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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 002-93477-D
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I-STORM, INC.
(Name of small business issuer in its charter)
NEVADA 87-0410127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2440 West El Camino Real, Suite 520 94040-1400
Mountain View, California (Zip Code)
(Address of principal executive offices)
(650) 962-5420
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for the fiscal year ended December 31, 1998 totaled
$2,856,000.
The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on June 30, 1999, as reported by the OTC
Bulletin Board, was approximately $10,094,700.
As of June 30, 1999, there were 5,457,304 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FORWARD LOOKING INFORMATION
THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF THE COMPANY
OR MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE
TO THE COMPANY OR MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND SIMILAR
EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEW OF
THE COMPANY REGARDING FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISKS AND UNCERTAINTIES NOTED.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM
THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR
INTENDED. IN EACH INSTANCE, FORWARD-LOOKING INFORMATION SHOULD BE CONSIDERED IN
LIGHT OF THE ACCOMPANYING MEANINGFUL CAUTIONARY STATEMENTS HEREIN.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
I-Storm, Inc. ("I-Storm" or "the Company") is a full service online
E-commerce provider specializing in the architecture, management and operation
of outsourced E-commerce and E-business channel solutions for Fortune 500
companies. Headquartered in Silicon Valley, I-Storm launched the I-Storm
CyberStore strategy in May 1998, a joint venture program to finance, design,
develop, and operate electronic commerce storefronts in partnership with
brand-name consumer, financial and technology product companies.
Electronic commerce or "E-commerce" is the direct retail sale of goods
and services over the Internet. Over the past five years, the Company has
developed electronic and on-line commerce on behalf of major international
manufacturing and technology corporations including: Netscape, E*Trade, Inc., US
Robotics, Inc., Hewlett-Packard Company, Sun Microsystems, Inc., Mitsubishi,
Inc., and others. In particular, the Company designed and developed the
Egghead(TM) Software and the Cisco Systems, Inc. Internet retail transaction
sites, two successful E-commerce sites on the Web today.
I-Storm is the parent company of LVL Communications Corporation
("LVL"), a Silicon Valley Internet marketing, advertising and technology
services company. Collectively, herein, LVL shall be referred to with I-Storm as
"the Company."
I-Storm acquired LVL through a subsidiary merger in July 1998. LVL had
emerged from Chapter 11 bankruptcy proceedings on April 16, 1998 with full
creditor approval of a Plan of Reorganization filed on March 23, 1998. LVL had
entered bankruptcy proceedings only after the collection default of a major
corporate client. LVL obtained $1,083,000 in 1998 bridge financings from private
investors to fund its reorganization costs, and merged with I-Storm, formerly
named Digital Power Holding Company ("Digital"), an inactive public company. In
March 1999, I-Storm terminated its advertising service business to focus on
E-commerce and CyberStore development. The Company presently earns no revenue
from its former advertising services business clients or from Cyberstore
entities.
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The Company is headquartered in Mountain View, California in an 11,500
square foot leased office facility. The Company has 19 full time employees.
INDUSTRY BACKGROUND
The Internet, as a channel of distribution, is dramatically changing
the way products are bought and sold. The advantages to buying online are
obvious to those who use this new electronic commerce ("E-commerce") channel:
convenience, lower cost, greater choice and deeper support. Corporate America
understands the benefits to selling online: broader customer access, deeper
customer relationships and lower costs of distribution. The Internet has spawned
a number of highly successful retail businesses that have grown to multi-million
dollar operations.
However, despite certain success stories, the challenges that face most
branded product companies--lack of creative expertise, technical and
organizational hurdles, commitment of required resources, and the perceived
long-term return on investment--make it very difficult for them to effectively
develop the technically superior in-house marketing and advertising resources
necessary to generate revenue through the Internet.
I-STORM, INC.
I-Storm is the parent company of LVL, a marketing communications and
Internet technology company located in Silicon Valley and founded by Calbert Lai
and Stephen Venuti in 1986, which has launched a strategy to finance, design,
develop, and operate E-commerce storefronts in partnership with brand-name
consumer technology product companies ("Product Partners").
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Over the past five years the Company's wholly owned subsidiary, LVL,
developed on-line E-commerce strategies and mechanisms on behalf of major
international manufacturing and technology corporations including: Netscape,
E*Trade, Inc., US Robotics, Inc., Hewlett-Packard Company, Sun Microsystems,
Inc., Mitsubishi, Inc. and others. In particular, the Company designed and
developed the Egghead(TM) Software ("Egghead") and Cisco Systems, Inc. ("Cisco")
retail transaction sites, which are two successful E-commerce sites on the Web
today. Based upon Management's experience with these ventures, in May 1998, the
Company formally launched its "I-Storm CyberStore" strategy.
Under the I-Storm CyberStore approach, the Company intends to provide
all necessary financial and professional resources required to build and operate
an electronic commerce storefront capable of selling technology-related and
other products direct to consumers and businesses (an "I-Storm CyberStore").
Each I-Storm CyberStore is expected to exclusively feature a Product Partner's
brand names and would be seamlessly tied to the Product Partner's corporate,
product-specific and other web-sites. From a customer's point-of-view, the
I-Storm CyberStore would be a "company store" dedicated to the Product Partner's
entire line of products, including parts, accessories and related products.
I-Storm does not presently derive revenue from, nor does it hold an ownership
interest in, a Cyberstore.
EFFICIENCIES AND LEVERAGE OF AN E-COMMERCE CHANNEL
The E-commerce channel offers customer and product-specific data
dissemination with lower distribution costs while increasing efficiencies by
leveraging a business's current infrastructure. Marketing and communications can
be targeted to individual customers, increasing effectiveness and lowering costs
by reducing the need for broad communication vehicles. Sophisticated consumers
can be educated about highly technical and application specific products and
customize their product choices after review of E-commerce product summaries.
Moreover, online retail stores are not limited by expensive shelf space and can
offer a full assortment of products, including hard-to-sell discontinued and
out-of-stock merchandise. Inventory is easier to monitor and control which
leverage increased manufacturing productivity and enable supply chain
management.
Businesses that wish to establish a major marketing presence on the
Internet encounter significant challenges, however. The technical requirements
to building a successful E-commerce business are complex. There are many
products that solve parts of the problem, but few integrative and comprehensive
solutions. Integration with existing legacy systems, including inventory, order
tracking, financial systems, telesales systems and other major elements of large
corporate structures, can be overwhelming.
Organizational hurdles complicate the issues. Manufacturers who have
had no direct exposure to retail customers suddenly find themselves needing
different skill sets and expertise outside of their core competence. In short,
although most recognize the potential reward of E-commerce, corporate America is
moving slowly to take advantage of the channel for three major reasons: the
difficulty in building and operating a successful store; the significant capital
outlay required to enter the channel seriously; and the uncertain timeline for
profitability.
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I-STORM CYBERSTORE STRATEGY
I-Storm's solution and strategy is to finance, design, develop, and
operate commercial Internet web-sites in partnership with brand-name consumer
product companies on an outsourced basis. The Company intends to leverage its
reputation as a provider of online marketing and E-commerce solutions to build
and co-own domestic and internationally-recognized branded selling sites. The
key elements of the Company's strategy to accomplish this goal are to: (i)
partner with major brands, (ii) provide risk capital and expertise in exchange
for ownership, and (iii) build, operate and manage branded retail I-Storm
CyberStores on an outsourced basis.
Utilizing the advertising, marketing and Internet expertise of its
wholly-owned subsidiary, LVL, I-Storm has been negotiating in 1998 to build and
manage E-commerce web sites within one or two years from their introduction in
partnership with world class branded product companies.
When reviewing a company as a potential Product Partner, I-Storm looks
for evidence of a large web-enabled and educated customer base and for products
that can be effectively and specifically described and purchased over the
Internet. The Company's strategy, based upon its experience in developing
commercial web sites for Egghead(TM) Software and Cisco Systems, Inc., is to
pursue Product Partner candidates where at least 10% of the Product Partner's
revenue can be sold over the Internet to web-enabled customers. This includes
both consumers and businesses, particularly small office/home office ("SOHO")
businesses.
Ownership of the I-Storm CyberStore is proposed to be structured as a
joint venture or royalty partnership that splits returns between the Company and
the Product Partner in a manner permitting the Company to consolidate sales and
pre-tax profits while sharing a portion of those profits with the Product
Partner.
Under such a joint venture or royalty partnership structure, I-Storm
will propose to design, build and operate the I-Storm CyberStore, including
Internet-based advertising and promotion, and customer development. The Product
Partner would provide its brand name, product line, and would be responsible for
inventory and order fulfillment. Product shipments would be made from the
Product Partner's inventory directly to the customer with I-Storm handling
billing, collections, and sales order processing. After an initial period of
four or five years, Management anticipates that the Product Partner would have
the option to purchase the Company's ownership of the I-Storm CyberStore at fair
market value and assume complete control of the business.
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In summary, the development of I-Storm CyberStores through an I-Storm
Product Partnership is intended to provide manufacturers with a quick, low risk
path to a profitable, customer-direct channel within the constraints of their
existing corporate strategy and infrastructure. The Company intends to benefit
by being able to access the massive product, manufacturing, and brand-name
investment resident in Product Partners' businesses through a revenue and equity
sharing corporate or contractual entity.
EXTENDING I-STORM'S CORE BUSINESS INTO E-COMMERCE
Much of the Company's capabilities have been developed over the past
twelve years through LVL's history of selling and marketing technology products
to commercial and consumer customers on a consultant basis on behalf of
fee-based clients. LVL's interactive group has designed, developed, or consulted
with respect to approximately 35 client E-commerce and/or information web-sites
over the past three and one-half years. Exemplative of LVL's creation of
successful retail I-Storm CyberStore-type sites are Egghead
and Cisco Internet Junction:
EGGHEAD, INC.: In early 1995, LVL created one of the web's first
online E-commerce sites for Egghead. The site features full online
shopping and purchasing capabilities with an inventory of over 3,000
products. In 1997 the online store outsold each of Egghead's 200
traditional storefronts and accounting for over 10% of Egghead's total
retail sales. The average sale through the site was more than twice
that of Egghead's retail outlets and it generated higher gross
margins.
CISCO SYSTEMS, INC.: In 1996, when Cisco purchased Internet Junction, a
manufacturer of Internet software, Cisco decided that "online" would be
the only retail distribution channel through which customers could
purchase the software. Cisco asked LVL to build the commerce mechanism
that could perform credit card authorization and verification, creation
of a software key, and automatic download of the product.
Management views the Egghead and Cisco E-Commerce sites as
demonstrative only of the capability of the I-Storm management team to design
and build successful E-Commerce sites. I-Storm does not have an ownership or
revenue interest in either the Cisco or Egghead E-Commerce sites. Further, the
performance of the Egghead and Cisco E-commerce sites may not be indicative of
an average performing E-commerce website.
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RELATIONSHIP WITH ORACLE CORPORATION
In May 1998, Oracle Corporation ("Oracle"), a global supplier of
software for enterprise information management, entered into a Memorandum of
Understanding with I-Storm to potentially produce and manage electronic
marketing sites for high profile consumer brand companies. Under the proposed
arrangement, it is anticipated that I-Storm would have the right to own and
develop each E-commerce site for the target account, and Oracle would
subcontract its software and technical consulting services on an "as-needed
project basis." Both Oracle and I-Storm propose to jointly invest the pre-sales
and up-front marketing resources needed to win the target account. The
E-commerce sites would be co-branded with both the "On Oracle" and the "I-Storm"
commerce marks. On July 6, 1999, Oracle and I-Storm reaffirmed their commitment
to work together to provide services to Fortune 500 companies pursuing
aggressive and focused channel-building programs. To date the Company and Oracle
have not entered into an agreement with a product partner, nor has the Company
earned revenue as a result of its relationship with Oracle.
I-STORM CYBERSTORE ECONOMICS
The economic model for individual I-Storm CyberStores takes advantage
of two key factors: (i) the ability to leverage the Product Partner's existing
inventory and fulfillment systems, and (ii) the existing brand names and large
marketing/advertising budgets. This combination will allow the I-Storm
CyberStore to manage operating expenses effectively and efficiently while
benefiting greatly from existing communications programs that drive web traffic
and product demand. The following percentages have been developed by, and are
solely the opinion of, I-Storm's management based upon its experience working
with traditional retail selling distribution, and from its knowledge of the
retail products sales industry:
Typical retailers of computer products (CompUSA, Computer City, etc.)
are burdened with high overhead costs associated with storefronts and sales
personnel. I-Storm's management estimates that in such traditional retail
situation gross profit is typically calculated as 14% of sales, and operating
expenses in this category range between 9-10% of sales. Retailers also need to
spend substantial amounts of advertising and promotional dollars in order to
drive traffic to their particular chain.
Typical "Internet-only" retailers (Amazon.com, CDNow, Software.net,
N2K) work with margins in the range of 15-20%. They have similar operating
expenses (in the range of 9-10% of sales). However, most of these
"Internet-only" stores are required to spend a substantial percentage of sales
on advertising and marketing (in the range of 15-20%) in order to create a brand
and drive customer traffic.
The I-Storm CyberStore model proposes to take advantage of a Product
Partner's existing infrastructure to substantially decrease operating expenses
as well as to leverage its Product Partner's large advertising and marketing
expenses. Because I-Storm CyberStores are expected to be designed to utilize
their Product Partner's inventory, warehousing, and fulfillment systems, overall
operating expenses should be significantly reduced. Unlike "Internet-only"
companies and traditional retailers, model I-Storm CyberStore would not need to
spend large amounts of independent advertising dollars since they will directly
benefit from the millions of dollars their Product Partners have already spent
to generate awareness and sales. Based on LVL's prior work with Egghead, Cisco,
and other technology manufacturers, the Company projects 10-15% of total sales
to come through the Internet within two years of opening and operating an
I-Storm CyberStore. These projections are solely the opinion of I-Storm's
Management, based upon LVL's experience in building E- commerce websites and
developing E-commerce marketing and advertising strategies for a range of
branded consumer and technology product companies.
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I-STORM CORPORATE PARTNERS AND ADVISORS
In 1998, the Company developed relationships with certain companies and
individuals which, in the opinion of Management, will help to strengthen
I-Storm's ability to develop and operate I-Storm CyberStores effectively. These
companies and individuals included:
ORACLE CORPORATION: Oracle Corporation is a leading supplier of
corporate database software in more than 140 countries, with
approximately 12,000 employees worldwide, dedicated to designing,
integrating, and programming database solutions. Under the May 5, 1998
Memorandum of Understanding with I-Storm, both I-Storm and Oracle
proposed to develop a mutual scaleable model for the ongoing
development of profitable world-class electronic marketing sites, and
as of July 6, 1999, Oracle and I-Storm reaffirmed this commitment. The
Company and Oracle have not, to date, entered into an agreement with a
Product Partner, nor hast he Company derived any revenue to date as a
result of its relationship with Oracle.
I-STORM ADVISORY BOARD: In May of 1998, I-Storm held its first meeting
of the I-Storm Advisory Board. This organization was created to provide
the new business with experience and contacts in key areas of
merchandising and marketing. Members of the Advisory Board are expected
to serve for a year term. Certain 1998 members of the I-Storm
Advisory Board were as follows:
MATTHEW HOWARD is a thirty-year veteran in executive
management for major U.S. retailers. Mr. Howard has served as
Senior Executive Vice President of both Marketing and
Merchandising for Sears, as President of Computer City, a
subsidiary of Tandy Corporation, and as an Executive Vice
President of Montgomery Ward. Mr. Howard is also a director of
the Company.
PETER JANSSEN was a member of the start up team that developed
the Sears Business Systems Center. After 18 years at Sears,
Mr. Janssen left to head sales and marketing for several
technology start-up companies, including Mindset, the Amdek
Division of Wyse, Nexgen Microsystems, and Acer Computers,
where he was responsible for Acer's entry into the consumer
channels of distribution and growing that division to $500
million in four years. Mr. Janssen later served as the head of
Merchandising and Marketing for Egghead(TM) Software Together
with LVL, Mr. Janssen implemented EGGHEAD.COM., one of the
first E-commerce Internet sites.
For the past two and one-half years, Mr. Janssen has headed
his own firm, Peter Janssen & Associates ("PJA"), a technology
consulting firm specializing in helping technology companies
develop and implement their sales marketing and channel
marketing strategies and tactics.
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I-STORM CYBERSTORE PARTNERSHIPS
The Company has approached a targeted number of brand-name consumer
product companies regarding the I-Storm CyberStore program. As a result, on
December 7, 1998 the Company signed a letter of understanding with Sun
Microsystems, Inc. ("Sun"), a leading manufacturer and global provider of
network computing systems, including UNIX based workstations, microprocessors,
Internet/intranet services, and Java(TM) software. Sun's products command a
significant share of a rapidly growing segment of the computer industry and are
used for many demanding commercial and technical applications in various
industries. The Sun Letter of Intent authorizes the Company to do a feasibility
study on establishing an I-Storm CyberStore dedicated to exclusively selling Sun
and compatible products to retail customers for profit.
Further, on June 16, 1999, the Company entered into a three-year
E-commerce Sales and Marketing Agreement with AIG Warranty Services and
Insurance Agency ("AIG"). During the three-year term of the Sales and Marketing
Agreement, I-Storm will be the exclusive on-line marketer of AIG's on-line
warranties and service contract agreements. To date the Company has not earned
any revenue as a result of its relationship with AIG.
In 1998, the Company also signed non-binding letters of understanding
and pursued feasibility studies for the construction of CyberStores, as follows:
GARDEN BOTANIKA: Garden Botanika ("GBOT") is a marketer of all-natural
personal care products through direct mail and 267 company-owned retail
locations
THE HIGH-TECH GROUP: The High-Tech Group ("HTG") is a premier provider
of merchandise and membership fee services in the credit card
syndication industry, and holds the rights to market products and
merchandise to over 75 million existing credit card holders of major
oil companies, banks and departments stores such as AMOCO, BP, Bank
One, Chase Manhattan, Montgomery Ward and Sears.
ABERCROMBIE AND KENT: Abercrombie and Kent is a specialty provider of
luxury vacations and adventure travel to seven continents and over 100
countries.
PHILIPS ELECTRONICS, INC. Philips Electronics, Inc. is a $39 billion
manufacturer of consumer electronics and other products. The Philips
Mobile Computing Group ("PMCG") is a product division based in San
Jose, California, which is rolling out a line of handheld,
sub-notebook, and notebook computers intended for mobile professional
users.
Although PMCG, Garden Botanika, HTG Group and Abercrombie and Kent
signed letters of intent with the Company in 1998, there can be no assurance
that the Company will enter into final CyberStore Agreements with any of these
potential Product Partners, and the Company has not entered into any such
agreements as of September 30, 1999. The Company, to date has not constructed
CyberStores for these entities, nor has the Company received any revenue from
these entities.
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LVL COMMUNICATIONS CORPORATION
LVL, a marketing, advertising and internet technology Company,
headquartered in Mountain View, California View, has had a twelve-year track
record of creative and technical success in serving marketers of
consumer-oriented technology products. Founded in 1986 by Calbert Lai and
Stephen Venuti, and also known as "Lai, Venuti and Lai," LVL specialized in
offering a wide range of strategic communication services that help its clients
market their products, services and messages to targeted segments of the
consumer population. These services included market research, corporate and
product market strategy development, identity definition, product branding,
consumer and technical media services, advertising and promotion and interactive
advertising development. In particular, LVL has been a provider of integrated
communications to consumers that take advantage of emerging technologies and new
media, including electronic communications such as the Internet, the World Wide
Web, on-line services, PC-related media (CD-ROMs, multi-media, etc. LVL was
inducted into INC. MAGAZINE'S Hall of Fame as one of the 500 fastest-growing
companies in America for six consecutive years from 1991 through 1996.
In Management's view, LVL's business was built upon its ability to
provide its corporate clients with the intellectual structure and creative
resources necessary to design and deliver market communications to appropriate
consumer audiences using traditional and new media. In 1997, the LVL was named
"Agency of the Year" by MARKETING COMPUTERS magazine for its integration of
traditional and new media disciplines to increase a company's marketing
efficiencies and effectiveness.
Although LVL achieved the foregoing recognition for twelve
year-operation of its advertising and marketing services business in Silicon
Valley, LVL suffered substantial losses in 1997 as a result of the payment
default of a major corporate client. Although in 1998 LVL was able to reorganize
under Chapter Eleven bankruptcy proceedings with creditor approval, and although
the Company has changed its focus from traditional advertising services to
providing joint venture-based E-commerce channels and CyberStore development,
there can be no assurance that the Company as a newly-reorganized corporation
will achieve profitability or remain as a going concern. The Company presently
has no revenue from any former LVL advertising services business client.
PRE-MERGER LVL SERVICES AND CLIENTS
The following is a list of former customers that represented $50,000 or
more in annual billings for LVL in various twelve-month periods from December
1996 through December 1998:
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<TABLE>
<S> <C> <C> <C>
Netscape US Robotics, Inc. Bay Networks, Inc. Hewlett-Packard Company
Disney Cisco Systems, Inc. Mitsubishi, Inc. Bank of America
Group, Inc. DirectTV, Inc. Philips Electronics, Inc. 3COM
E*Trade Sun Microsystems, Inc. Acer, Inc.
</TABLE>
Because of the project-oriented nature of its services, LVL's
traditional services revenues tended to be concentrated in a handful of clients
at any one time. Accordingly, LVL's largest client accounted for approximately
50% of the Company's revenues for the period commencing January 1, 1998 and
ending December 31, 1998. For the period commencing from July 17, 1998 and
ending December 31, 1998, five clients accounted for 79% of the Company's
revenue with no client accounting for more than 26.3% of the Company's revenue
for that period.
In March 1999, the Company reorganized its internal corporate structure
and terminated the advertising services business formerly handled in LVL
Advertising, Inc. The Company phased out this traditional advertising business
to focus its managerial, technical and capital resources on its strategy of
financing, developing and operating E-commerce storefronts with Product
Partners. The Company presently has no revenue from any former advertising
service business client or from any Cyberstore.
I-STORM COMPETITION
Use of the Internet is growing at very high rates and many well
financed companies are operating or developing web-based businesses currently.
At the same time, barriers to entry into web-based commerce are low and an
extremely large number of individuals and small companies are offering goods of
all types for sale over the Internet on web-sites of varying levels of
sophistication.
The markets for the Company's services are highly competitive and are
driven by client demands for better service (more effective programs, quicker
response times, and implementation of new electronic tools or media) and
perceived price and performance of its services. Although the Company has built
a market position for itself in its traditional services area, there are few
barriers to entry in the advertising business and interactive marketing
business. The Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the marketing communications
market and it expects to face additional competition from new entrants in the
market in the future. In particular, the niche that the Company traditionally
serves is considered to be an attractive, high-growth segment of the advertising
industry. Current and prospective competitors include international, national,
and regional advertising agencies, specialized communications firms currently
operating in a single medium (such as the Internet), and firms such as CKS
Group, Inc. and Think New Ideas, Inc., Organic On-Line, Studio Archetype, and
Agency.com which all share the Company's market focus. Although the Company is
actively implementing its CyberStore concept, the Company also faces a highly
competitive market in this segment of its services. E-commerce competitors
include: Claremont, Andersen Consulting, Cambridge Technologies, IBM and EDS.
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EMPLOYEES OF THE COMPANY
As of December 31, 1998, the Company and its subsidiaries employed 26
full-time and one part-time employees. The Company employs highly skilled
computer and creative-oriented personnel from the Silicon Valley area. Seven
employees had annual salaries of $100,000 or more.
As of June 30, 1999, the Company and its subsidiaries employed 21
full-time and one part-time employees. The number of employees decreased as a
result of the Company's cessation in March 1999 of the advertising line of
business, formerly managed by LVL Advertising, Inc. As of June, 1999, six
employees have annual salaries of $100,000.
Neither the Company's nor the subsidiaries' employees are unionized.
Management believes that it has good working relations with its employees.
ADDITIONAL RISK FACTORS RELATED TO BUSINESS OPERATIONS AND CAPITAL RAISES
OPERATING LOSSES
The Company realized significant operating losses in 1997 and 1998.
There can be no assurance that the Company will generate profit or positive cash
flows from operating activities in the Year 2000 or the future. The Company
terminated its traditional advertising services business in March 1999 and
presently receives no revenue from those former clients. If the Company is
unable to achieve profitability or positive cash flows from operating
activities, it will not be able to meet its working capital or future debt
service requirements, which would have a material adverse effect on the
Company's ability to continue to operate. See "Financial Statements."
MANAGEMENT OF GROWTH; ONGOING CAPITAL REQUIREMENTS; PRIOR SALES TO ACCREDITED
INVESTORS ONLY; RISK OF LOSS OF ENTIRE INVESTMENT
The conduct of the Company's business and the continued implementation
of its business plans and operations will require the availability of additional
capital funds in the Year 2000 and the future. To date, the Company has raised
capital only through bridge financings and the private placement offerings of
Series B and Series C Preferred Stock to accredited investors only. To be an
"accredited investor," under Securities and Exchange Commission ("SEC" )rules,
generally speaking, an individual must either have one million dollars in net
worth, not including the value of one's residence or automobile; or one must
have earned $200,000 in income in each of the previous income tax years. An
accredited investor must also be capable of understanding and evaluating the
risks of a particular investment. All shareholders and investors in I-Storm are
advised that I-Storm is a development stage company which has realized
significant operating losses in each of the past two fiscal years, and that he
or she presently stands the risk of losing his entire investment in the Company.
While the Company currently has no material commitments for capital or
other expenditures, other than as set forth herein, it is the Company's
intention to continue to implement the growth of its business and expand its
operations, which may require additional financing. If needed, there can be no
assurance that the Company will be able to successfully negotiate or obtain
additional financing.
NEW E-COMMERCE BUSINESS STRATEGY
The Company is engaging a new E-commerce business strategy with respect
to the partnership of I-Storm CyberStores with brand-name consumer product
companies ("Product Partners") to finance, design, develop and operate Internet
commercial web-sites. The Company terminated its traditional advertising
services business in March 1999. Although the Company believes it has the
critical blend of skills necessary to develop and successfully operate such
Product Partner ventures, there can be no assurance that the Company will be
able to establish or maintain strategic alliances with any Product Partner, or
that any associated I-Storm CyberStore will generate sufficient revenue to
produce a profit. In addition, I-Storm's ability to maintain its partnerships
with Product Partners and develop new Product Partners depends to a significant
degree on the quality of its services and its ability to generate revenue and
profit from its initial I-Storm CyberStores. Further, the success of I-Storm's
CyberStore business will be driven in large part by the strength of the
brand-names and product lines of its Product Partners. The Company expects to
have little influence on the products and non-Internet-related advertising
strategies of its Product Partners.
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INDUSTRY CONSOLIDATION, CLIENT RELATIONSHIPS
The Company's ability to continue to generate new business is dependent
upon the Company's continued relationship with key executives of its clients. In
addition, consolidation in clients' industries can result in the immediate loss
of substantial clients and revenue streams without any advanced notice. Such
occurrences can cause the Company to incur substantial and unchanged overhead,
while experiencing a rapid loss of revenue. There can be no assurances that such
consolidation or loss of clients will not occur in the future.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE; DEPENDENCE UPON THE INTERNET ABSENCE OF PRESENT
CYBERSTORES
The Company provides an integrated approach to meet the marketing
communications and E-commerce needs of its clients. To compete successfully
against specialized service providers, the Company believes that its products
and services in each marketing communication discipline will need to be
competitive with the services offered by the firms that specialize in each
discipline. The Company's ability to derive revenues will depend in part upon a
robust industry and the infrastructure for providing Internet access and
carrying Internet traffic. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, operating results and financial
condition could be materially adversely affected. There also can be no assurance
that the Company will be successful in providing competitive solutions to
clients through its integrated marketing communication services and products, or
through the establishment of E-commerce web sites. Failure to do so could result
in the loss of existing customers or the inability to attract and retain new
clients, either of which developments could have a material adverse effect on
the Company's business, financial condition and operating results. Although the
Company's strategic business plan contemplates the development of E-commerce
CyberStores in conjunction with brand-recognizable Product Partners, there can
be no assurance that any such CyberStores will be developed.
HIGH COSTS TO MAINTAIN SKILLED LABOR FORCE
A high percentage of the Company work force is either highly-skilled
computer or creative-oriented personnel, both of which are extremely expensive
and contribute to a high monthly payroll compared to other companies of its size
and revenues. The Company is headquartered in Mountain View, one of the most
expensive areas in the already costly Silicon Valley, where demand for skilled
employees and real estate has skyrocketed. Out of the Company's 19 full-time
employees, 11 of them are paid salaries of more than $60,000 per year, and of
those, 6 have annual salaries in excess of $100,000. As in most service industry
companies, the Company's fixed costs are a high percentage of its monthly
overhead and cannot be easily or quickly reduced in the event of decrease in
business. Such high fixed costs can rapidly cause such a company to operate at a
deficit. The inability to attract, hire or retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
operating result and financial condition.
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GOING CONCERN QUALIFICATION
As discussed elsewhere in this 10-KSB Report, and by the Company's
Accountants in the notes to the Financial Statements, the bankruptcy proceedings
significantly affected the Company's capital structure, liquidity and capital
resources. These factors and others discussed elsewhere and in the notes to the
"Financial Statements" raise substantial doubt about the ability of the Company
to continue as a going concern and about the ability of the Company to realize
its Reorganization Asset. The Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty.
VOTING CONTROL BY THE OFFICERS AND DIRECTORS OF THE COMPANY'S COMMON STOCK
As of June 30, 1999, the Company's executive officers, directors and
controlling stockholders directly or beneficially hold most of the outstanding
shares of Common Stock. The Company's officers, directors and controlling
stockholders currently are, and in the foreseeable future will continue to be,
in a position to control the Company by being able to nominate and elect a
majority of the Company's Board of Directors. The Board of Directors establishes
corporate policies and has the sole authority to nominate and elect the
Company's officers to carry out those policies.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of Calbert Lai, co-founder,
President and Director, and Stephen Venuti, co-founder, Executive Vice President
and General Manager, as well as a group of other talented employees with
industry relationships and technical knowledge of the Company's operations. The
loss of any of them or the inability of the Company to recruit and train
additional key technical and sales personnel in a timely manner, could
materially and adversely affect the business of the Company and its future
prospects. There can be no assurance that the Company will be able to continue
to attract and retain the qualified personnel necessary for the development of
its business. The Company does not maintain key person life insurance policies
on any of its officers and employees. The Company intends to provide key man
life insurance for Calbert Lai, Steven Venuti, its officers and key employees.
If the Company is unable to obtain adequate financing in the near future, it
will not be able to retain its existing personnel.
NASDAQ OR AMEX LISTING
On September 15, 1999, the United States Bankruptcy Court for the
Northern District of California issued an order closing the Chapter Eleven
bankruptcy proceedings for LVL Communications Corporation, the wholly owned
subsidiary of I-Storm, based upon the Company's satisfaction of substantial
payments required under the April 16, 1998 Plan of Reorganization. No creditor
interposed an objection to the closing of the bankruptcy proceeding on September
15, 1999.
The Plan of Reorganization had imposed a condition that the Company apply
for NASDAQ listing within 90 days of July 17, 1998, the date upon which LVL
became a wholly owned subsidiary of the Company, also known as the "Effective
Date" of the Plan. This condition was imposed based upon the Plan of
Reorganization's assumption that the Company would raise sufficient equity
financing within 90 days of the Effective Date to satisfy a minimum NASDAQ
capital listing requirement of $4,000,000.
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The Company made an immediate and good faith effort to raise such equity
financing, and did raise over $4 million dollars by February 18, 1999 through
its Series B Preferred Stock Offering. Because of operational cash flow needs
stemming from the implementation of E-commerce strategy and the expense and time
required to prepare audited financial statements to accompany the 1998 Form
10-KSB and other required SEC reports, the Company has not been able to meet
applicable requirements to apply for listing on NASDAQ or AMEX. Substantial time
was required to prepare these reports, in part, because of fresh start
accounting requirements imposed upon bankruptcy reorganization.
The Board of Directors is actively negotiating with financial consultants
to raise sufficient capital to permit the Company to apply for NASDAQ or AMEX
listing at the end of the first quarter of the Year 2000, or within the second
quarter of Year 2000. The Company expects to be current in all SEC reporting by
December 15, 1999. Nevertheless, there can be no assurance that the Company will
have sufficient capital in the first or second quarter of the Year 2000 to meet
NASDAQ or AMEX listing requirements or that NASDAQ or AMEX will accept the
Company for listing even if the Company should meet NASDAQ or AMEX's capital
requirements at that time.
LVL's Plan of Reorganization was initially approved, and its bankruptcy
proceeding was recently closed in September 1999, by the Bankruptcy Court
without objection from its creditors. Creditors may retain a right under state
or federal law to challenge actions of LVL and its parent, the Company, with
respect to the implementation of the Plan of Reorganization, including a late
filing of the NASDAQ or AMEX application Presently, no creditor has voiced an
objection or presented a formal challenge to any actions taken by LVL or the
Company pursuant to the Plan of Reorganization. The United States Bankruptcy
Court for the Northern District of California found on September 15, 1999 that
the Plan had been substantially implemented.
ABSENCE OF CASH DIVIDENDS AND NO CASH DIVIDENDS ANTICIPATED
The future payment by the Company of cash dividends on its Preferred or
Common Stock, if any, rests within the discretion of its Board of Directors and
will depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors. The
Company does not anticipate making any cash distributions upon its Preferred or
Common Stock in the foreseeable future. The payment of dividends on the Shares
is subordinate to the payment of dividends on Series A and B Preferred Stock.
FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHERS
Under the Plan of Reorganization, 1,095,284 shares of freely tradable
Common Stock have been issued to officers, directors or to beneficial owners
holding 10% or more of the Company's Common Stock, under an exemption from
Securities Act registration, pursuant to Section 1145 of the Bankruptcy Code and
Section 3(a)(7) of the 1933 Securities Act, and 2,494,716 shares of freely
tradable Common Stock have been issued to those who are not officers, directors
or to beneficial owners holding 10% or more of the Company's Common Stock. Of
this freely tradable Common Stock, 2,290,756 shares are subject to lock-up
agreements restricting their sale for a period of until February 2000. These
lock-up agreements may be modified or waived upon the mutual consent of the
Company and the placement agent which facilitated the sale in early 1999 of the
Company's Series B Cumulative Convertible Preferred Stock.
Additionally, as of December 31, 1998, 1,597,800 shares of Common Stock
that have not been registered pursuant to the Securities Act have been issued to
officers, directors or to beneficial holders holding 10% or more of the
Company's Common Stock. In the event a public market for the Company's Common
Stock were to develop in the future, of which no assurances can be given, sales
of this unregistered Common Stock may be made by management and others pursuant
and in compliance with the provisions of Rule 144 of the Securities Act. In
general, under Rule 144, a person who has satisfied a one-year holding period
may, under certain circumstances, sell within any three-month period a number of
shares which does not exceed the greater of one percent of the then outstanding
shares of Common Stock or the average weekly trading volume in shares during the
four calendar weeks immediately prior to such sales. Rule 144 also permits,
under certain circumstances, the sale of shares without any quantity or other
limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. Future sales of such shares made under Rule
144 may have an adverse effect on the then prevailing market price, if any, of
the Common Stock and adversely affect the Company's ability to obtain future
financing in the capital markets as well as create a potential market overhang.
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ITEM 2. DESCRIPTION OF PROPERTY.
As of December 31, 1998, the Company's headquarters was located on 15,847
square feet of leased office space at 480 Cowper Street, Palo Alto, California
94301. The Company was occupying the space on a month-to-month basis following
the expiration of a 15-year lease.
In March of 1999, the Company moved its headquarters to a leased office
facility at 2440 West El Camino Real, Suite 520, Mountain View, California
94040-1400. The new location consists of approximately 11,500 square feet and
the Company has entered into a two-year lease for the facility.
ITEM 3. LEGAL PROCEEDINGS.
PLAN OF REORGANIZATION AND MERGER OF LVL INTO DIGITAL'S WHOLLY-OWNED SUBSIDIARY
The Company has been reorganized pursuant to a Plan of Reorganization
("Plan of Reorganization") filed by LVL on March 23, 1998, that has recently
been confirmed by the United States Bankruptcy Court ("Bankruptcy Court") for
the Northern District of California ("Order") without creditor objection on
April 16, 1998. The Order approved the merger of LVL into Digital, an inactive
public company, or into its wholly-owned subsidiary, and to take a series of
steps to protect certain prior creditor interests.
In contemplation of the merger, on May 6, 1998, I-Storm Acquisition Corp.
entered into a Stock Purchase Agreement with the holders of a majority of the
common stock of Digital, Chiracahua Company, Melinda Johnson and Leonard
Burningham, to purchase 600,000 shares of Digital's outstanding common stock for
$150,000, with an option to purchase an additional 100,000 shares of Digital's
outstanding common stock from existing shareholders at $2.00 per share,
exercisable any time from May 6, 1998 through May 6, 1999.
Digital had been organized under the laws of the State of Nevada on
February 24, 1984, under the name "Interventure." Digital had been an inactive
public company from 1989 through 1998, and other than maintaining and restoring
the Company's good standing certificate, Digital's only material business
operation was to seek prospective business or assets to acquire. Digital had no
revenues from 1989 to 1998. In March 1998, Digital voluntarily filed a Form
10-SB with the Securities and Exchange Commission.
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On July 15, 1998, pursuant to the Plan of Reorganization and with
appropriate approval from the California Secretary of State's Office, the two
wholly-owned subsidiaries of LVL, LVL Interactive, Inc. and LVL Advertising,
Inc., merged into LVL, the parent company, leaving LVL as the sole surviving
California corporation. On July 17, 1998, the wholly-owned subsidiary of
Digital, Digital Acquisition Corporation, merged into LVL, with approval from
the California Secretary of State's Office, resulting in LVL becoming the
wholly-owned subsidiary of Digital, a Nevada corporation. On July 20, 1998,
Digital was renamed "I-Storm, Inc." by amendment to its Articles of
Incorporation.
Under the Plan of Reorganization, the Company will be required to pay
certain secured claims, including principal and interest, over a period of five
years, in equal quarterly annual installments. Asserted secured claims were held
by Dot Printers, Inc., for the amount of $210,000, and by George Rice & Sons,
for the amount of $24,589.71. The Company is presently challenging the secured
status of these claims, as well as the claims of certain other creditors to
approximately $386,500 as secured debt, although there can be no assurance that
the Company will prevail in its position. The Company will also retain a prior
factoring relationship with Pacific Business Funding Corporation, which has
provided a secured receivables line of credit to LVL, prior to the Plan. The
Company will also issue 600,000 shares of Series A Preferred Stock to certain
unsecured creditors under the Plan. The holders of such Series A Preferred Stock
shall have the right to receive cumulative dividends at a rate of $0.05 per
share, per year, prior and in preference to any payment of any dividend on the
Common Stock of the Company or any other equity security of the Company. The
dividends, rights and preferences of the Series A Preferred Stock will also be
senior to those of the Common Stock and of any other equity security of the
Company. Upon the occurrence of certain Liquidation Preference Events, the
holders of Series A Preferred Stock are entitled to receive a preference payment
equal to $6.67 per share for each share of Series A Preferred Stock, plus an
amount equal to all declared but unpaid dividends thereon, prior to any
distribution of funds and assets to any other class of shareholder. Such
Liquidation Preference Events are the liquidation, dissolution or winding up of
the Company, or the sale, merger or combination of Company, a public offering in
excess of $25 million, a merger or consolidation of the Company in which its
shareholders do not retain a majority of the voting power in the surviving
corporation, or a sale of all or substantially all of Company's assets. Should
there be insufficient assets to permit payment of the foregoing in full to all
holders of the Series A Preferred Stock, then the assets of the Company will be
distributed ratably to the holders of Series A Preferred Stock and then to the
Common Stock of the Company.
Although the Board of Directors authorized the issuance of 600,000 shares
of Series A Preferred Stock on July 23, 1998, the Company has awaited the final
determination by the Bankruptcy Court of the pool of unsecured creditors that
will be entitled to share on a pro rata basis in accordance with their claims,
in order to make an appropriate issuance of such Series A Preferred Stock.
Retirement of Contingent Liability Under the Plan of Reorganization
As of September 1, 1999, the Company had entered into agreements with
certain creditors of LVL Communications Corporation to retire in their entirety
certain alleged secured claims which they had made in connection with the LVL
Plan of Reorganization, in the aggregate amount of $588,775. Such creditors
agreed that they would retire their claims in their entirety for an aggregate
sum of $149,694. As of September 10, 1999, the Company has paid this aggregate
sum of $149,694 in its entirety.
Closing of Bankruptcy Estate
On September 15, 1999, the United States Bankruptcy Court for the Northern
District of California issued an order closing the Chapter Eleven bankruptcy
proceedings for LVL Communications Corporation, the wholly owned subsidiary of
I-Storm, based upon the satisfaction of substantial payments required under the
April 16, 1998 Plan of Reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "ISTM." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. Prior to the third quarter of
1998, there was no public market for the Company's Common Stock. Only a limited
public market for the Company's Common Stock existed in the third and fourth
quarters of 1998 and bid prices may not be indicative of fair market value or a
sustained trading market. The range of high and low bid information for the
Company's Common Stock for each full quarterly period during the Company's last
two fiscal years, is as follows:
PERIOD HIGH BID LOW BID
------ -------- -------
Fiscal 1997
-----------
1st quarter - -
2nd quarter - -
3rd quarter - -
4th quarter - -
Fiscal 1998
-----------
1st quarter - -
2nd quarter - -
3rd quarter $7.00 $0.25
4th quarter $4.00 $0.25
Fiscal 1999
-----------
1st quarter $10.75 $3.25
2nd quarter $8.00 $3.50
These quotations were obtained from OTC Electronic Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions.
Trades were not made on a daily basis. On December 30, 1998, the closing bid
price for the Company's Common Stock was $3.50. As of the same date, there were
274 holders of record of Common Stock. As of June 30, 1999, the closing bid
price was $4.125 and the number of holders of record was 244.
The trading price of the Company's Common Stock has been and in the
future is expected to be subject to extreme fluctuations in response to both
business-related issues, such as quarterly variations in operating results, the
timing of commencement or completion of client projects, reductions or increases
in client spending on marketing communications services, announcements of new
services or business acquisitions by the Company or its competitors, and the
gain or loss of client accounts, and stock market related influences, such as
changes in estimates of securities analysts, the presence or absence of
short-selling of the Company's stock, and events affecting other companies that
the market deems to be comparable to the Company. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations that
have particularly affected the market price of many technology-oriented
companies and that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. The trading
prices of many high technology and Internet-related companies' stocks are at or
near their historical highs and reflect price/earning ratios substantially above
historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near any current or previous level.
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The Company currently intends to retain future earnings to fund the
development and growth of its business and therefore does not anticipate paying
cash dividends within the foreseeable future. Any future payment of dividends
will be determined by the Company's Board of Directors and will depend on the
Company's financial condition, results of operations and other factors deemed
relevant by its Board of Directors.
SALES OF UNREGISTERED STOCK
PRIVATE PLACEMENT OFFERING OF THE SERIES C PREFERRED STOCK
Subsequent to December 31, 1998, the Company raised a total of $4,550,000
in gross proceeds from a private placement offering of Series C Cumulative
Convertible Preferred Stock ("Series C Preferred Stock"), made pursuant to
Section 506 of Regulation D, at a price per share of $12.25 to 18 accredited
investors. The offering of such Series C Preferred Stock ("the Offering")
commenced on February 22, 1999 and concluded on May 31, 1999. A total of 371,429
shares of Series C Preferred Stock were offered and sold by the Company with the
assistance of financial consultants who received a consulting fee equal to 12%
of gross proceeds or $546,000. Additionally, certain consultants received
warrants to purchase 2,040 shares of Series C Preferred Stock at an exercise
price of $12.25. After deducting the consulting fees, a total of $4,004,000 in
proceeds was received by the Company from the Offering. The net proceeds are
being used for the development of I-Storm E-commerce stores, for normal
operating expenses during the Company's development stage, and for general
working capital purposes.
The Series C Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15, and November
15, of each year, payable at the option of the Company either in shares of
Series C Preferred Stock or in cash. The right of the Series C Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock or Series B
Preferred Stock. The shares of Series C Preferred Stock are convertible into
Common Stock at any time following the closing of the Offering, at the option of
the holder, into such number of shares of the Company's Common Stock as shall
equal $12.25 divided by the lower of $3.50 (the "Conversion Price"), or should
the closing bid price for any five consecutive trading days during the period
commencing 11 months after the Final Closing of the Offering and ending one
month thereafter be less than $3.50, the Conversion Price shall be readjusted to
that price, provided, however, that in no event shall the Conversion Price be
reduced below $2.80. The number of shares of Common Stock to be issued upon
conversion shall also be subject to certain antidilution provisions.
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Each share may be converted into Common Stock at the Conversion Price at
the option of the Company, at any time after one year from the Final Closing of
the Offering, upon the payment to the holder of any unpaid accumulated
dividends, in cash or Common Stock, at the option of the Company. The Common
Stock exercisable upon conversion of the Shares shall have piggy-back
registration rights effective from the Final Closing of this Offering and shall
have demand registration rights effective from the Final Closing until 12 months
thereafter.
PRIVATE PLACEMENT OFFERING OF SERIES B PREFERRED STOCK
The Company raised a total of $4,996,439 in gross proceeds from a private
placement offering of Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Stock"), made pursuant to Section 506 of Regulation D, at a price per
share of $12.25, to 84 accredited investors. The offering of such Series B
Preferred Stock ("the Offering") commenced on December 11, 1998 and concluded on
February 18, 1999. A total of 407,900 Shares of Series B Preferred Stock were
offered and sold through Weatherly Securities Corp. ("Weatherly"), a placement
agent which received a 10% placement fee and a 3% non-accountable expenses
allowance, or 13% of the gross proceeds of the sale of such Series B Preferred
Stock Offering, less certain expenses, for a total of $599,512. Weatherly also
received as compensation for the Offering Warrants to purchase 40,790 shares of
Series B Preferred Stock. After deducting the placement agent's fees and
expenses, a total of $4,396,927 in proceeds was received by the Company from the
Offering. The majority of such proceeds was used to fully retire its outstanding
bridge loans, which had been incurred both pre- and post-bankruptcy; to almost
fully retire its loans under a factoring agreement, and to pay down many of its
outstanding expenses and professional fees. The balance of the proceeds is being
used for the development of I-Storm CyberStores and for general working capital
purposes.
The Series B Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15 and November
15 of each year, payable at the option of the Company either in shares of Series
B Preferred Stock or in cash. The right of the Series B Preferred Stock to
payment of either cash or common stock dividends is subordinate to the right to
cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B Preferred Stock are convertible into Common stock at any time following
the closing of the Offering, at the option of the holder, into such number of
shares of the Company's Common Stock as shall equal $12.25 divided by the lower
of $3.50 (the "Conversion Price"), or should the closing bid price for any five
consecutive trading days during the period commencing 11 months after the Final
Closing of the Offering and ending one month thereafter be less than $3.50, the
Conversion Price shall be readjusted to that price, provided, however, that in
no event shall the Conversion Price be reduced below $2.80. The number of shares
of Common Stock to be issued upon conversion shall also be subject to certain
antidilution provisions. Each Share may be converted into Common Stock at the
Conversion Price at the option of the Company, at any time after four years from
the Final Closing of the Offering, upon the payment to the holder of any unpaid
accumulated dividends, in cash or Common Stock, at the option of the Company.
The Common Stock exercisable upon conversion of the Shares shall have piggy-back
registration rights effective from the Final Closing of this Offering and shall
have demand registration rights effective from the Final Closing until 12 months
thereafter.
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BRIDGE FINANCING
LVL's Plan of Reorganization was confirmed by the Bankruptcy Court on
April 16, 1998 (the "Confirmation Date"). Events occurring prior to the
Confirmation Date are referred to herein as "Pre-Confirmation" events. Events
occurring after the Confirmation Date are referred to herein as
"Post-Confirmation" events
Prior to confirmation of the Plan of Reorganization, Trident III, L.L.C.
("Trident") provided LVL $600,000 in Pre-Confirmation bridge financing, which
has been used for reorganization costs and for working capital purposes. In
consideration and repayment of this Pre-Confirmation bridge financing, Trident
has been issued 600,000 shares of non-voting Common Stock in the Company,
redeemable at $1.00 per share, and 440,000 shares of non-redeemable voting
Common Stock. These shares were issued pursuant to the Order and Plan of
Reorganization and are exempt from registration under the federal securities
laws pursuant to Section 1145 of the Bankruptcy Code.
Trident has also provided $258,000 in Post-Confirmation bridge financing
to the Company for reorganization and working capital purposes. In partial
consideration for this Post-Confirmation bridge financing, Trident has been
issued an additional 91,200 shares of non-redeemable non-voting Common Stock in
the Company which is unregistered Common Stock subject to Rule 144 restrictions.
Trident was also entitled to receive interest, at a rate of 10% per annum, on
any outstanding unpaid balance of the total of $258,000 in Post-Confirmation
bridge financing which it has provided to the Company in connection with the
reorganization. In January 1999, Trident was repaid all Post-Confirmation bridge
financing with accrued interest from the proceeds of the Series B Preferred
Stock offering.
The Company also received $100,000 in Pre-Confirmation bridge financing,
used for reorganization costs and working capital purposes as follows: a $50,000
Promissory Note from Pac Rim Access Group, Inc., repayable with accrued interest
at a rate of 10% per annum; and a $50,000 Promissory Note from Masamitsu
Ishihara, repayable with accrued interest at a rate of 10% per annum. In January
1999, these amounts were repaid in full from the proceeds of the Series B
Preferred Stock offering.
The Company has received an additional $300,000 in Post-Confirmation
bridge financing (the "July 1998 Bridge Financing") as follows: (i) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; and (ii) $75,000 in Promissory Notes from each of
Frederick Meyers and Richard David, for a total of $150,000, repayable with
accrued interest at a rate of 10% per annum. Each of the foregoing Promissory
Notes will be paid from the earlier of the First Closing of this Offering, or
July 31, 1999. As part of the July 1998 Bridge Financing, the Company issued
warrants to purchase Common Stock of the Company, exercisable at $0.001 per
share to each of these bridge financiers as follows: (i) 60,000 warrants to Four
M International; and (ii) 30,000 warrants, to each of Frederick Meyers and
Richard David, for a total of 60,000 warrants. The proceeds of this bridge
financing was used for reorganization costs and working capital purposes. In
January 1999, these amounts were repaid in full from the proceeds of the Series
B Preferred Stock offering.
The Company received an additional $425,000 in Post-Confirmation bridge
financing (the "September 1998 Bridge Financing") as follows: (i) a $300,000
Promissory Note from the Security Trust IRA for Robert L. Wilson, repayable with
accrued interest at a rate of 10% per annum; (ii) a $100,000 Promissory Note
from Wink Capital Management, Ltd., repayable with accrued interest at a rate of
10% per annum; and (iii) a $25,000 Promissory Note from Philip Cory Roberts,
repayable with accrued interest at a rate of 10% per annum. As part of the
September 1998 Bridge Financing, the Company issued warrants to purchase Common
Stock of the Company, exercisable at $0.001 per share to each of these bridge
financiers as follows: (i) 120,000 warrants to Security Trust IRA for the
benefit of Robert L. Wilson, or its designees; (ii) 40,000 warrants to Wink
Capital Management, Ltd.; and (iii) 10,000 warrants to Philip Cory Roberts. The
proceeds of this bridge financing were used for working capital purposes. In
January 1999, these amounts were repaid in full from the proceeds of the Series
B Preferred Stock offering.
20
<PAGE>
ISSUANCE OF COMMON STOCK AND OPTIONS TO CONSULTANTS
In August 1998, the Board approved the issuance of shares of Common Stock
to certain consultants for strategic management and financial consultants of the
Company as follows: Benchmark Equity Group, Inc. ("Benchmark"), 557,800 shares;
Jeffrey W. Tomz, 42,200 shares; Fordham Financial Management, Inc., 100,000
shares; Weatherly Securities Corp. 1,000,000 shares; Pound Capital, Inc.,
225,000 shares; and New Leaf, L.L.C., 75,000 shares. Benchmark received an
additional 40,000 shares in January 1999 related to further bridge financing
services.
In July 1999, the Board, subject to shareholder approval of the 1998
Incentive and Non-Statutory Stock Option Plan ("1998-B Plan") approved the
contingent grant of performance based options to purchase 150,000 shares of
Common Stock of the Company to NSA, a provider of business consulting services,
exercisable such market price per share as shall be in effect at the time, if
any, that shareholder approval shall be obtained for the 1998-B Plan.. The
options will cliff-vest in five years, subject to performance conditions and are
also accelerable, based upon certain performance conditions. "Cliff-vest" means
that all of the options granted shall vest in their entirety at a certain point
in time in the future, rather than ratably over a period of time, except that,
in this instance, the options may vest earlier if certain performance conditions
are met.
In July 1999, the Board approved the grant of performance based options
to purchase 10,000 shares of Common Stock of the Company to each of Marv Su and
Jerry Klemushin, a provider of business consulting services, exercisable at such
market price per share as shall be in effect at the time, if any, that
shareholder approval shall be obtained for the 1998-B Plan. The options will
cliff-vest in five years, subject to performance conditions and are also
accelerable, based upon certain performance conditions.
In April 1999, consultant Michael Kanas became entitled, subject to Board
approval, for services rendered, to 10,000 options exercisable at such market
price per share as shall be in effect at the time, if any, that shareholder
approval shall be obtained for the 1998-B Plan.
In May 1999, Mackenzie Shea, Inc. or its designees became entitled,
subject to Board approval, for financial consulting services rendered, to a
warrant to purchase 2,040 shares of Series C Preferred Stock, exercisable for
five years for a price of $12.25 per share.
The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to Section 4(2) of the Securities
Act as transactions by an issuer not involving any public offering. All
certificates representing such securities were appropriately legended.
21
<PAGE>
ISSUANCE OF COMMON STOCK, OPTIONS AND WARRANTS PURSUANT TO THE ORDER AND PLAN
OF REORGANIZATION
On July 23, 1998, the Board of Directors approved the issuance of certain
shares of Common Stock, Series A Preferred Stock and warrants in accordance with
the Order of the Bankruptcy Court, confirming the Plan of Reorganization. Such
shares of Common Stock, Series A Preferred Stock, and warrants, and the Common
Stock underlying such warrants are or will be issued pursuant to Section 1145 of
the United States Bankruptcy Code, and as such, are exempt from registration
under the federal securities laws, except with respect to an underwriter of such
securities.
The Board approved issuances of Shares of Common Stock, Series A
Preferred Stock and warrants as follows: Calbert Lai, 297,642 shares of Common
Stock; Stephen Venuti, 297,642 shares of Common Stock; Don Sanders, 4,016 shares
of Common Stock; Mackenzie Shea, Inc., or its designees, 500,000 shares of
Common Stock; Thomas A. Schultz, or his designees, 500,000 shares of Common
Stock; and 440,000 shares of Common Stock to Trident III, L.L.C.
The Company, pursuant to the Order and Plan of Reorganization, also
issued 600,000 shares of non-voting common Stock to Trident III, L.L.C. which
was initially redeemable at $1.00 per share. In January 1999, Trident III,
L.L.C. notified the Company that it wished to waive the right to redeem this
Common Stock; accordingly, Trident III, L.L.C. presently holds 600,000 shares of
non-redeemable non-voting stock, issued pursuant to the Order and Plan of
Reorganization.
In accordance with the Order and Plan of Reorganization, the Company also
issued 25,000 warrants to purchase Common Stock, exercisable at $0.50 per share,
to Mascia and Associates and 50,000 warrants to Pacific Business Funding, Inc.,
both creditors under the Plan. The Company also authorized the issuance of
275,000 service warrants, exercisable at $0.50 per share, to various service
providers, all in accordance with the Plan.
Each of the foregoing shares of Common Stock, Series A Preferred Stock,
and the common stock underlying the exercise of the warrants, except for shares
of Common Stock issued to Trident III, L.L.C., were issued subject to an
eighteen-month lock-up agreement negotiated between the Company and its
placement agent for Series B Preferred Stock, as required by the Bankruptcy
Court. Pursuant to the Bankruptcy Court's instructions, releases from the
lock-up agreement were on a pro rata basis. As of December 31, 1998, the
placement agent and the Company had agreed to release ten percent (10%) of the
foregoing securities from the lock-up. The shares of Calbert Lai and Stephen
Venuti are also subject to a further lock-up imposed by the Bankruptcy Court.
Shares of Messrs. Lai and Venuti may only be released the earlier of the time of
thirty-six months after July 17, 1999,a liquidation preference event, or the
date the closing bid price reported on the NASDAQ market system for the common
stock of I-Storm has exceeded the conversion price of the Series A Preferred
Stock for the consecutive trading days.
EMPLOYEE STOCK OPTION PLAN UNDER THE PLAN OF REORGANIZATION ("1998 A STOCK
OPTION PLAN")
In August 1998, the Board approved the establishment of an employee
stock option plan ("the 1998 A Stock Option Plan") consisting of options to
purchase 1.4 million shares of Common Stock, pursuant to the Plan of
Reorganization, and the options and underlying stock set aside for issuance upon
exercise of such warrants are also exempt from registration under Section 1145
of the Bankruptcy Code. As of December 31, 1998, options approved by the Board
to be issued from the 1998 A Stock Option Plan were as follows: Calbert Lai,
600,000 options, Stephen Venuti, 300,000 options Timothy Cohrs, 75,000 options,
Stuart Mangrum, 127,500 options, David Beach, 100,000 options. The remaining
197,500 options were distributed among approximately 35 employees and
consultants with no single recipient being distributed more than 30,000 options.
22
<PAGE>
All of the 1998 A Stock Option Plan options are exercisable at $0.50 per
share. Except for options granted to Calbert Lai and Stephen Venuti, all such
options will vest ratably over a period of three years on an annual basis. With
respect to Messrs. Venuti and Lai, one-half of these options will vest ratably
over a period of not less than three years from the date of grant, and the
remaining one half shall not vest until the Company has had sales of at least
$12 million for any 12 consecutive month period and the Company is profitable on
a quarterly basis through the same 12 month period.
ADDITIONAL EMPLOYEE STOCK OPTION PLAN
In June 1999, the Board approved, subject to shareholder approval, the
establishment of the 1998 B-Plan, consisting of 1.5 million shares of common
stock. Such options and the stock underlying such options are not exempt from
registration under the federal securities laws and shall each bear appropriate
legends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENT
This Management's Discussion and Analysis contains certain
forward-looking statements and information relating to the Company that are
based on the beliefs of the Company or management as well as assumptions made by
and information currently available to the Company or management. When used in
this document, the words "anticipate", "believe," "estimate," "expect" and
"intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current view of the Company regarding future events and are subject
to certain risks, uncertainties and assumptions, including the risks and
uncertainties noted. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. In each instance, forward-looking information
should be considered in light of the accompanying meaningful cautionary
statements herein.
REORGANIZATION ASSET
The Company has adopted foregoing "fresh start" accounting policies in
accordance with Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code (SOP 90-7)."
In accordance with SOP 90-7, the Company's Balance Sheet reflects a
"Reorganization Asset" of $3,060,000. The Reorganization Asset was determined by
the Company connection with the consummation of the Plan of Reorganization.. The
calculation of the Reorganization Asset was reviewed by Arthur Andersen, LLP
which concurred with the methodology, and assumptions used in this calculation.
The purpose of developing the "Reorganization Asset" is to aid parties in
interest in the bankruptcy proceeding in fairly determining their respective
allocations of value under the Plan of Reorganization. Under SOP 90-7, a
reorganization asset must approximate the fair value of the Company at the time
of the confirmation of the Plan of Reorganization, before considering the
liabilities of the Company at that time. It is intended in theory to approximate
the amount a willing buyer would pay for the assets immediately following
bankruptcy restructuring. The Reorganization Asset is effectively allocated
amongst creditors and shareholders, as reflected in the Company's Equity section
of the Balance Sheet, in accordance with their legal priorities under the Plan
of Reorganization.
The Reorganization Asset is derived from estimates of future net cash
flows, discounted to present basis, that are reasonably predicted to be earned
by the Company over time, based upon such factors as market share and position,
projected sales growth, potential profitability, competition, general economic
considerations, seasonality and working capital requirements at the time of the
confirmation of the Plan of Reorganization. Because the Company was changing its
focus from an advertising service business to an internet E-Commerce business,
the Company also took into account a phase-out of its traditional advertising
services business to refocus on its new strategy of financing, designing,
developing and operating E-commerce storefronts, the growth rate of the internet
market, and projected sales and profitability growth within that internet
market.
The Reorganization Asset is not a liquid asset. The Reorganization Asset
does not reflect the Company's actual current cash flow, cash equivalents or
current accounts. It is only a reasonable estimate of the future performance of
the Company that may or may not be achieved. It is an intangible asset that is
valued only upon Management's future estimates of discounted cash flows based
upon the foregoing enumerated factors.
The Reorganization Asset is being currently amortized or written down
over a period of ten years .The Reorganization Asset and its amortization time
period will be evaluated quarterly (from time to time?), and may be decreased
dependent upon the Company's actual performance.
All other assets of the Company, excluding the intangible Reorganization
Asset, were reflected on the Company's Balance Sheet at current market value,
rather than historical value, as a result of applicable SOP 90-7 bankruptcy
reorganization accounting policies.
23
<PAGE>
RESULTS OF OPERATION
On April 16, 1998, the Company's Reorganization Plan was confirmed by the
United States Bankruptcy Court and the Company emerged from bankruptcy
reorganization. The Plan of Reorganization resulted in a net reduction of
approximately $6,734,000 in principal and accrued interest on the Company's
Accounts Payable. As a result of the Reorganization, the recording of the
restructuring transaction and the implementation of Fresh Start Reporting, the
Company's results of operations after July 17, 1998 (the cutoff date used for
financial reporting purposes) are not comparable to results reported in prior
periods. See Note 1 to the accompanying consolidated financial statements for
information on consummation of the Plan of Reorganization and implementation of
Fresh Start Reporting. To facilitate a meaningful comparison of the Company's
operating performance in fiscal years 1998, 1997 and 1996, the following
discussion of results of operations on a consolidated basis is presented on a
traditional comparative basis for all periods. Consequently, the prior years'
information presented below does not comply with accounting requirements for
companies upon emergence from bankruptcy, which requirements call for separate
reporting for the newly reorganized company and the predecessor company.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
The Company's net loss for the year ended December 31, 1998 was
approximately $5,183,000 and arose primarily as a result of operating losses and
expenses associated with the Company's reorganization and subsequent merger with
Digital. The Company's net loss for the year ended December 31, 1997 was
approximately $2,872,000, primarily due to operating losses. The Company's
operating loss for the year ended December 31, 1998 was $4,701,000 as compared
to an operating loss of $2,438,000 for the year ending December 31, 1997. The
increase in operating loss of approximately $2,263,000 was caused primarily by a
decline in gross profit from the prior year of approximately $1,563,000 and an
decrease in operating expenses of approximately $932,000. Included in the fiscal
1998 net loss is non-cash depreciation and amortization of approximately
$280,000 due primarily to amortization of the Company's Reorganization asset of
$3,060,000 million as of December 31, 1998.
Revenue for the years ended December 31, 1998 and 1997 were $2,913,000
and $6,108,000, respectively, a decrease of approximately $3,195,000 due to the
change in focus of the Company from generating advertising service revenue to
seeking financing for the newly-merged corporation and developing E-commence
partnerships. Gross profit for the years ended December 31, 1998 and 1997 were
$439,000 and $2,002,000, or 15% and 33 % of sales, respectively. The decrease in
gross profit was primarily a result of the Company's shift away from advertising
service revenue toward E-commerce development activities.
Operating expenses for the years ended December 31, 1998 and 1997 were
$7,614,000 and $8,546,000, respectively. The decrease in operating expenses of
approximately $932,000 from the period a year earlier was primarily due to
financial consultants fees and attorneys' fees of $406,000 related to the
Company's reorganization, merger, and financing activities.
Interest and Other expenses for the years ended December 31, 1998 and
1997 were $482,000 and $434,000, respectively. As of December 31, 1998, the
outstanding debt of the Company was approximately $1,457,000, primarily all of
which is classified as current.
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<PAGE>
The Company's auditors issued a going concern report. There can be no
assurance that Management's plans to reduce the Company's working capital
deficiency or to obtain additional financing will be successful.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had current assets of $312,000 and
$778,000 in December, 31, 1997, while cash and cash equivalents were $5,000 at
year end 1998 compared to $0 at year end 1997. The Company's working capital
(deficit) at December 31, 1998 was $(3,445,000) as compared with a working
capital (deficit) of $(7,956,000) at December 31, 1997. This decrease in the
working capital (deficit) of approximately $4,558,000 is the result of a
reduction of Current Liabilities of $5,010,000 offset by an decrease of Current
Assets of $462,000.
As of December 31, 1998, the Company owed $1,457,000 under notes payable
to certain shareholders. The Company also has a Factoring Agreement in place
with a lender secured by the Company's accounts receivable and other assets,
with a factoring liability as of December 31, 1998 of $1,144,000 up from
$821,000 as of December 31, 1997. The Company is in compliance with all material
covenants of the shareholder notes payable and Factoring Agreement as of year
end 1998.
For the year ended December 31, 1998, net cash utilized by operations was
$1,907,000 compared to cash utilization of $321,000 for the year ended December
31, 1997, primarily as a result of the Company's Reorganization and a net loss
for the year of $5,183,000.
As of December 31, 1998, Company management believes that the current
cash balance, cash from operations, and anticipated borrowings will not be
sufficient to meet the Company's liquidity needs for the next 12 months. The
Company is pursuing additional equity investment to fund its operating expenses
and working capital needs for the coming year. There can be no assurance that
the Company will be able to obtain sufficient capital under acceptable terms to
fund its operations and investment strategy. Without additional capital, there
is substantial doubt about the ability of the Company to continue as a going
concern and about the ability of the Company to realize its Reorganization
Asset.
INVESTING
Capital expenditures for the years ended December 31, 1998 and 1997 were
$12,000 and $287,000, respectively.
The Company owed approximately $1,083,000 in short-term debt financing at
December 31, 1998. All of such short-term debt was subsequently repaid from the
proceeds of the Series B Stock Offering in January 1999.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
The Company's operating loss for the year ended December 31, 1997 was
$2,438,000 as compared to an operating loss of $3,497,000 for the same period in
1996. This decrease in operating loss was primarily attributable lower operating
expenses resulting from the downsizing of Company operations.
The Company's sales for the years ended December 31, 1997 and 1996 were
$6,108,000 and $8,321,000, respectively. The decrease in sales of approximately
$2,213,000 is primarily attributable to the loss of a major client and the
Company's inability to replace lost revenue with new clients during the year.
25
<PAGE>
Cost of sales for the years ended December 31, 1997 and 1996 were
$4,106,000 and $3,805,000 or 67% and 46% of sales, respectively. Gross profit
for the years ended December 31, 1997 and 1996 were $2,002,000 and $4,516,000 or
33% and 54% of sales, respectively.
Operating expenses for the years ended December 31, 1997 and 1996 were
$4,440,000 and $8,013,000, respectively. Interest expense for the years ended
December 31, 1997 and 1996 was $320,000 and $225,000, respectively. As of
December 31, 1997, the outstanding debt of the Company was approximately
$8,161,000.
CASH USED FOR OPERATIONS
For the year ended December 31, 1997, cash used for operations was
$321,000 as compared to $959,000 of cash generated from operations for the year
ended December 31, 1996. The Company intends to use future debt or equity
financing or debt-to-equity conversions to help satisfy past due amounts and to
pay down its debt obligations. There is no assurance that the Company will be
able to raise the necessary capital under acceptable terms, in any, or succeed
in its attempt to convert debt to equity. Should the Company fail to raise
necessary cash, it runs the risk of ceasing operations or being forced to
reorganize through bankruptcy.
YEAR 2000 READINESS DISCLOSURE
This Readiness Disclosure is provided to advise of I-Storm's Year 2000
Compliance program for both I-Storm's internal systems and web sites designs. As
used herein, "Year 2000 Compliant" means that I-Storm has confirmed that under
the conditions of I-Storm's internal testing, I-Storm's internal systems and web
sites designs will perform as follows: (i) date calculations will neither cause
any abnormal termination of performance nor generate inconsistent results and
(ii) when sorting by date, all records will be sorted in accurate sequence.
Please note that this Readiness Disclosure is not provided as a certification,
representation, warranty or guarantee, express or implied, regarding Year 2000
Compliance and does not create or modify any contractual relationships.
I-Storm has allocated both personnel and other resources towards
achieving the Year 2000 Compliance of all of I-Storm's internal systems. In
implementing its Year 2000 Compliance program, I-Storm has identified and
inventoried all Year 2000 sensitive components in our internal systems and are
working to achieve the Year 2000 Compliance of all its components. I-Storm has
also made reasonable efforts to contact all vendors and suppliers that provide
I-Storm with Year 2000 sensitive components in order to determine the compliance
of such components. It is the intent of I-Storm's Year 2000 Compliance program
to either repair or replace any components of our internal systems which are
determined not to be Year 2000 Compliant.
I-Storm is working towards full Year 2000 Compliance for all of its
products and services. Because I-Storm does not control other companies'
products, including other companies' hardware and software, I-Storm does not
promise that any other companies' products or software will not suffer any
errors or malfunctions related to Year 2000. While I-Storm tests all of its web
site designs, I-Storm does not certify that these sites will perform as tested
when used with other companies' products, when modified or customized, or when
used under circumstances not reflected in the testing I-Storm has performed. To
date, I-Storm has not encountered any problems associated with Year 2000
Compliance in its products, services, or internal systems, and will continue to
take all reasonable steps to ensure the same.
26
<PAGE>
In 1998, I-Storm incurred insignificant costs with respect to Year 2000
compliance expenses. I-Storm expects that it may incur approximately $70,000 in
1999 for Year 2000 compliance costs Although I-Storm foresees no other
significant Year 2000 compliance expenses, there is always a possibility of
unforeseen further expenses in 1999 and beyond with respect to Year 2000
compliance.
ITEM 7. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 23, 1998, the Board of Directors of the Company approved the
engagement of Arthur Andersen LLP as independent public accountants for the
Company. The Company had no disagreements with its former certifying
accountants, Jones, Jensen & Co. The former accountants did not resign or
decline to stand for reelection. The former accountants' reports on the
financial statement did not for either of the past two years contain an adverse
opinion or disclaimer of opinion other than a report of risk of failure to
continue as an ongoing concern; nor were such reports modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
with the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The former
accountants letter is attached as Exhibit 16.2.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company has established a five-member Board of Directors. On June 30,
1999, members of the Board of Directors were as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Frank M. DeLape 44 Director and Chairman of the Board
Calbert Lai 42 Director
Thomas A. Schultz 48 Director
John Matthews 38 Director
Matthew Howard 58 Director
</TABLE>
27
<PAGE>
FRANK M. DELAPE, Chairman of the Board. Mr. DeLape has served as the
CEO of Benchmark Equity Group, Inc. (Benchmark) since its formation in April
1994. Through Benchmark and its affiliates, Mr. DeLape has financed a number
of public companies in a multiple of industries such as telecommunications,
internet-services, retailing, business services and computer technology. Mr.
DeLape also served as a director of THINK New Ideas, Inc. from January 1996
until February 1998. Mr. DeLape has served as President, Secretary, Treasurer
and a director of Oak Tree Capital, Inc., a financial consulting firm, since
its formation in January 1996.
CALBERT LAI, Director. Co-founder and President of the Company since
1986, Mr. Lai has developed and expanded LVL's core business and product lines,
and has directed the Company's strategic marketing and consulting business for
highly recognizable brand names in the technology industry, such as IBM,
Netscape, Hewlett-Packard, Sun Microsystems, Cisco Systems, Mitsubishi
Electronics America, Acer Group, Fujitsu PC Corporation, 3COM/PalmPilot, NEC,
Philips Mobile Computer Group and Egghead.Com. A recognized expert in the
marketing of technology products to consumers and end users, Mr. Lai was
responsible for the launch into U.S. retail channels of the Acer PC, in 1993,
and the PalmPilot(TM), in 1996.
THOMAS A. SCHULTZ, Director. Mr. Schultz is a consultant to the Company
and a director. He has been the President and Chief Executive Officer of Vista
Technologies, Inc., a public surgical center firm from February 1996 to March
1997. Prior to joining Vista Technologies, Inc., Mr. Schultz served as
Chairman/Chief Executive Officer of Crystallume, a public corporation, from
February 1986 to January 1996. Mr. Schultz also serves on the Board of
Directors of Adrenalin Corporation, a public company. He is a CEO and director
of Cellgate, Inc., a private corporation and a director of Security Capital
Management and Electronic Design, Inc., also private corporations.
MATTHEW HOWARD, Director. Mr. Howard is a thirty-year veteran in
executive management for major U.S. retailers. Mr. Howard has served as Senior
Executive Vice President of both Marketing and Merchandising for Sears, as
President of Computer City, a subsidiary of Tandy Corporation, and as an
Executive Vice President of Montgomery Ward.
JOHN MATTHEWS, Director. In June 1999, the Board appointed John Matthews
to fill a vacancy left by Richard Snyder in April 1999. Mr. Matthews has been
the Chairman of the Board and Chief Executive Officer of Weatherly Securities
Corp. since June 1996. Mr. Matthews previously served as the Chief Operating
Officer of Americorp Securities, Inc., a New York based investment-banking firm,
from June 1992 to May 1996. From 1990 to 1992, Mr. Matthews was a Vice President
of Vantage Securities, Inc., an investment-banking firm located in Melville, New
York. In 1990, prior to entering the securities industry, Mr. Matthews served as
a Director of the New York Office of Senator Daniel Patrick Moynhihan (D-NY).
His responsibilities included managing the Senator's staff, coordinating all
intergovernmental relations in New York, serving as the Senator's senior
ombudsman, as well as directing legislative initiatives and constituent services
for the State of New York.
28
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From August 1, 1998 to April 1999, Richard Snyder, 53, served as a member
of the Board of Directors. Mr. Snyder had served as Senior Vice President and
General Manager of Dell Computers Americas and as Senior Vice president of World
Wide Sales, Marketing and Support for Compaq Computer Corporation. Mr. Snyder
also spent 18 years at Hewlett-Packard where he headed the $5 billion Ink Jet
printer business and was responsible for achieving a 65% market share and
creating the "Desk Jet" brand. Mr. Snyder currently serves on the Board of
Directors of VTEL Corp., InfinOp, Inc. and Guardian-On-Board, Inc. Mr. Snyder
left the Board of Directors in April 1999, and his vacancy was filled by the
appointment of John Matthews in June 1999.
The Company pays outside Board members a per diem of $1,000 per day and
reimburses directors for any reasonable expenses pertaining to attending
meetings, including travel, lodging and meals. In addition, for services as a
Board member, the Company has granted outside Board members options to purchase
25,000 shares of the Company's Common Stock at $3.50 per share which vest over
one year, and the Chairman of the Board will receive options to purchase 50,000
shares at $3.50 per share which shall also vest over one year.
All directors hold office for terms of one (1) year and until the next
annual meeting of stockholders scheduled to vote on such class of Directors and
the election and qualification of their respective successors. Officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning the
selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Thomas Schultz, Chairman of the Audit Committee, Matthew Howard and
Richard Snyder were members of the 1998 Audit Committee. Mr. Matthews has
replaced Mr. Snyder as a member of the 1999 Audit Committee.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Frank DeLape, Thomas Schultz and Matthew Howard were members of
the Compensation Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Except as set forth below, based solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1998, and
(iii) any known failure to file a required report by officers, directors and
beneficial owners of more than 10% of the Company's common stock is as follows:
Calbert Lai: one late report and one transaction not reported on a timely basis;
Steven Venuti: one late report and two transactions not reported on a timely
basis: Thomas Schultz, one late report; Frank DeLape, one late report; Matthew
Howard, one late report and Richard Snyder, one late report and John Matthews,
one late report. Such late reports have subsequently been filed.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's three most highly compensated executive officers serving at the end of
the year ended December 31, 1998 whose compensation was in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------- ------------------------ ---------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL YEAR SALARY($) BONUS($) ANNUAL STOCK OPTIONS/ PAYOUTS($) COMPENSATION
POSITION COMPENSATION($) AWARDS($) SARS(#) ($)
- --------------- ------- --------- --------- ---------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calbert Lai 1998 150,000 0 N/A 0 600,000 0 N/A
President and 1997 124,719 0 N/A 0 - 0 N/A
Treasurer 1996 332,500 0 N/A 0 - 0 N/A
1998 150,000 0 N/A 0 300,000 0 N/A
Stephen Venuti 1997 124,719 0 N/A 0 - 0 N/A
Vice President 1996 332,500 0 N/A 0 - 0 N/A
1998 260,000(1) 0 N/A 0 75,000 0 N/A
Timothy Cohrs 1997 180,520 0 N/A 0 - 0 N/A
Vice President 1996 87,670(1) 0 N/A 0 - 0 N/A
Stuart Mangrum 1998 104,428 0 N/A 0 127,500 0 N/A
Vice President 1997 59,492(2) 0 N/A 0 0 N/A
1996 - 0 N/A 0 0 N/A
David Beach 1998 97,435 0 N/A 0 100,000 0 N/A
Chief Information 1997 74,374 0 N/A 0 0 N/A
Architect 1996 63,587 0 N/A 0 0 N/A
</TABLE>
(1) Mr. Cohrs entered into an employment agreement with LVL Communications
Corporation in July 1996. Mr. Cohrs left the employment of I-Storm in
March 1999, and he received a pro rata portion of his annual compensation
to March 31, 1999.
(2) Mr. Mangrum was employed by the Company from April 1997 - December 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
options granted during the year ended, for the persons named in the Summary
Compensation Table (the "Named Executive Officers"):
30
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calbert Lai 600,000 61.0% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti 300,000 30.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs 75,000 8.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calbert Lai - 0 50,000 550,000 $175,000 $1,925,000
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti - 0 25,000 275,000 $87,500 $962,500
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs - 0 6,252 68,748 $21,882 $239,618
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
In 1998, the Company entered into employment agreements with Calbert Lai,
President and Treasurer, Stephen Venuti Vice President, and Timothy Cohrs Vice
President. As of March 1999, Mr. Cohrs ceased his employment with the Company as
a result of the Company's decision to pursue the E-commerce line of business,
and to terminate the advertising line of business.
Mr. Lai entered into an employment agreement with the Company, dated July
15, 1998, for a term of 36 months at an annual base salary of $150,000, with
eligibility for a performance bonus of up to 50% of base salary, as determined
by performance criteria to be established by the Board of Directors. Mr. Lai has
received employee stock options, pursuant to the 1998 A Stock Option Plan to
purchase 600,000 common shares of the Company at $0.50 per share, of which
300,000 shares will shall vest ratably over a period of 36 months from the
Employment Date; and of which 300,000 shares will only vest upon the Company's
sales revenue meeting or exceeding twelve million dollars ($12,000,000) for any
twelve-month period from the Employment Date and upon the Company's quarterly
revenue exceeding operating expenses for the same twelve-month period.
Mr. Venuti entered into an employment agreement with the Company, dated
July 15, 1998, for a term of 36 months at an annual base salary of $150,000,
with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Venuti has also received employee stock options, pursuant to the 1998 A
Stock Option Plan, to purchase 300,000 common shares of the Company at $0.50 per
share, of which 150,000 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 150,000 shares will only vest upon
the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period.
31
<PAGE>
Mr. Cohrs entered into an employment agreement with the Company on July
15, 1998, for a term of 36 months at a current annual salary of $240,000 per
year, with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Cohrs also received employee stock options, pursuant to the 1998 A Stock
Option Plan, to purchase 75,000 common shares of the Company at $0.50 per share,
of which 37,500 shares will shall vest ratably over a period of 36 months from
the Employment Date; and of which 37,500 shares will only vest upon the
Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period. Mr. Cohrs and the company mutually terminated this
agreement in March 1999 upon the cessation of the advertising services business.
At the time of termination, 7,292 of Mr. Cohrs' options were vested, and no
further warrants were due him.
In August 1998, David Beach, Vice President of Creative Services, was
granted 100,000 employee stock options to purchase Common Stock, exercisable at
$0.50 per share, pursuant to the 1998 A Stock Option Plan.
In August 1998, Stuart Mangrum, Vice President of Technology, was granted
125,500 employee stock options to purchase Common Stock, exercisable at $0.50
per share, pursuant to the 1998 A Stock Option Plan.
FURTHER EXECUTIVE COMPENSATION
Pending before the Board of Directors, as of June 30, 1999, is a proposal
to issue options to purchase Series C Preferred Stock, exercisable at $12.25 per
share, as follows: Calbert Lai, 255,000 options; Steven Venuti, 126,000 options.
CONSULTING AGREEMENTS
The Company entered into a twelve-month consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to
which the Company is obligated to pay $175,000 in twelve monthly installments to
Benchmark for merger and acquisitions consulting services rendered to either LVL
or the Company, commencing as of March 1, 1998. Benchmark also entered into an
agreement in April 1998 to provide consulting services to LVL and its successor
entity in consideration of 600,000 shares of unregistered Common Stock, and the
Board of Directors approved the issuance of this Common Stock to Benchmark or
its designees on August 1, 1998, subject to a 12-month lock-up agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a $170,500
cash fee in compensation for such services through December 31, 1998. The shares
are exempt from registration under the federal securities laws, in accordance
with Section 1145 of the Bankruptcy Code. The shares are subject to an 18-month
lock-up agreement, commencing August 1, 1998. Ten percent of such shares to date
have been released from the lock-up agreement.
32
<PAGE>
Additionally, MSI or its designees will receive 2,040 options to purchase
Series C Preferred Stock, exercisable at $12.25 per share, for consulting
services rendered to the Company, as of June 30, 1999.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz or his designees were issued 500,000 shares of the
Company's Common Stock in August 1998, The shares are exempt from registration
under the federal securities laws, in accordance with Section 1145 of the
Bankruptcy Code. The shares are subject to an 18-month lock-up agreement,
commencing August 1, 1998. Ten percent of such shares to date have been released
from the lock-up agreement. Mr. Schultz also was paid a total cash fee of
$166,365 in full compensation for such services to December 31, 1998. Mr.
Schultz has also received $100,000 in consulting fees from January 1, 1999
through June 30, 1999. Mr. Schultz is a director of the Company.
In March 1998, the Company engaged Fordham Financial Management, Inc.
("Fordham") as a consultant for financial consulting services in connection with
certain bridge financings. Fordham was paid a fee of 100,000 shares of Common
Stock of the Company as of August 1, 1998. Fordham's shares of Common Stock are
unregistered shares of Common Stock.
In August 1998, the Company engaged Weatherly Securities Corp.
("Weatherly") to provide investment banking services and strategic planning for
the management, capitalization and business development of the Company for a
flat fee of 1,000,000 shares of Common Stock of the Company, valued at $0.25 per
share. The shares of Common Stock issued to Weatherly were fully vested as of
August 1, 1998, are unregistered shares and are subject to an eighteen month
lock-up agreement.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to Pound were fully vested as of August 1, 1998, are
unregistered shares of Common Stock. In August 1998, the Company engaged New
Leaf, L.L.C. ("New Leaf") to provide investment banking services and strategic
planning for the management, capitalization and business development of the
Company for a flat fee of 75,000 shares of Common Stock of the Company, valued
at $0.25 per share. The shares of Common Stock issued to New Leaf were fully
vested as of August 1, 1998, and are unregistered shares of Common Stock.
Robert Tomz entered into a consulting arrangement with the Company on
December 8, 1998, whereby he was entitled to receive monthly compensation of
$8,000 a month and warrants to purchase 14,000 shares of Common Stock,
exercisable at $2.00 per share, each month for a period of 12 months commencing
January 11, 1999. Mr. Tomz also served briefly as Acting Chief Financial Officer
of the Company from January 1 to March 15, 1999. Mr. Tomz and the Company
terminated this consulting arrangement on June 15, 1999, and renegotiated the
consulting fee so that Mr. Tomz received in total $90,000 and 84,000 warrants to
purchase Common Stock of the Company exercisable at $2.00 per share.
33
<PAGE>
A financial consulting agreement was entered into between the Company and
Irfan Salim to provide managerial and financial consulting services to the
Company commencing April 1, 1999 on a month-to-month basis at a rate of $16,666
per month. Subject to approval of the Board of Directors and to Shareholder
approval of the 1998B-Plan. Mr. Salim also received 15,000 warrants exercisable
over a period of five years, which vested in January 1999 to purchase Common
Stock of the Company at an exercise price of such closing market price as shall
be in effect on the date, if any, of shareholder approval of the 1998B-Plan.
A business consulting agreement was entered into between Peter Janssen
and the Company in June 1998. Under this consulting agreement, Mr. Janssen was
paid $35,000 in 1998. Mr. Janssen's consulting agreement has been extended for
the year of 1999 for a monthly fee of $16,666.
A business consulting agreement was entered into between Matthew Howard,
a director, and the Company in June 1998. Under this consulting agreement, Mr.
Howard was paid $20,000 in 1998. Mr. Howard's consulting agreement has been
extended for the year of 1999 for a monthly fee of $5,000. As of July 1999, the
Board, subject to shareholder approval, granted options to purchase 100,000
shares of Common Stock of the Company to Mr. Howard, in further consideration of
his performance under the consulting agreement, exercisable at such market price
per share as shall be in effect at the time, if any, that shareholder approval
shall be obtained for the 1998-B Plan. Under this proposal, such options would
vest ratably on a monthly basis over a period of thirty six months.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
I-Storm, Inc. ("I-Storm" or the "Company") was formerly named "Digital
Power Holding Company." The following table sets forth certain information with
respect to the beneficial ownership of the Company's outstanding Common Stock
owned as of December 31, 1999 by: (i) beneficial owners of more than 5% of the
Company's Common Stock; (ii) each executive officer and director of the Company;
and (iii) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIAL OWNERSHIP
- ------------------- ------------------ --------------------
<S> <C> <C>
Calbert Lai 347,642(2) 6.0%
Stephen Venuti 322,642(3) 5.5%
Thomas A. Schultz 125,000(4) 2.1%
Benchmark Equity Group, Inc. 557,800(5) 9.5%
I-Storm Acquisition, Inc. 700,000(6) 11.9%
Frank M. DeLape 557,800(7) 9.5%
Trident III, L.L.C. 420,000(8) 7.2%
JSM Holding, Inc. 1,000,000(9) 17.1%
Richard Snyder 0 0%
Timothy Cohrs 0 0%
Matthew Howard 0 0%
All Officers and Directors as a Group 2,353,084
- ------------------------
</TABLE>
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended, and is generally
determined by voting powers and/or investment powers with respect to
securities. Unless otherwise noted, all of such shares of Common Stock
listed above are owned of record by each individual named as beneficial
owner and such individual has sole voting and dispositive power with
respect to the shares of Common Stock owned by each of them. Such person
or entity's percentage of ownership is determined by assuming that any
options or convertible securities held by such person or entity which are
exercisable within 60 days from the date hereof have been exercised or
converted as the case may be.
34
<PAGE>
(2) Includes 50,000 vested options to purchase common stock exerciseable at
$0.50 per share.
(3) Includes 25,000 vested options to purchase common stock exerciseable at
$0.50 per share.
(4) Does not include 200,000 shares of Common Stock held by Kayne
International Corporation, a Cayman Islands corporation, and 175,000
shares of Common Stock held by LaPlaza Capital, Inc. ("La Plaza"), a
Cayman Islands corporation that were designated by Mr. Schultz in
August 1998 to each of Kayne and La Plaza, respectively.
(5) Mr. DeLape, a director of the Company, is the President and controlling
shareholder of Benchmark Equity Group, Inc ("Benchmark").
(6) Includes 600,000 shares held in a voting trust for the benefit of the
shareholders of I-Storm Acquisition Corp., which is a wholly-owned
subsidiary of Lighthouse Capital Insurance Company ("Lighthouse"), a
Cayman Island unlimited licensed insurance company Includes 100,000
shares of Common Stock issuable under options exercisable at any time
until May 6, 1999 at an exercise price of $2.00 per share. I-Storm
Acquisition Corp. purchased these options from existing shareholders of
the Company as follows: options to purchase 40,000 shares from David
Merrill/dba Chiracahua Company; options to purchase 40,000 shares from
Melinda Johnson; and options to purchase 20,000 shares from Leonard
Burningham. Frank M. DeLape and his children are remote contingent
beneficiaries of a variable universal life insurance contract issued by
Lighthouse. Mr. DeLape disclaims beneficial ownership of such shares
and does not have voting or dispositive power with respect to such
shares.
(7) Includes 557,800 shares of Common Stock held by Benchmark. Mr.Delape, a
director of the Company is the President and controlling stockholder of
Benchmark. Does not include 700,000 shares of Common
Stock beneficially held by Lighthouse. Mr. DeLape disclaims beneficial
ownership of such shares held by Lighthouse and does not have voting or
dispositive power with respect to such shares.
(8) Does not include 600,000 shares of non-voting Common Stock held by
Trident III, L.L.C.
(9) John Matthews, a director of the Company, is the controlling stockholder
of JSM Holdings, Inc.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ISSUANCE OF STOCK TO DIRECTORS AND OFFICERS
Pursuant to the Plan of Reorganization, the Company has issued 297,642
shares of Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000
shares of Common Stock to Thomas A. Schultz, or his designees, as set forth
below. Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 597,800 shares of Common Stock, as of June 30, 1999.
Subject to shareholder approval, certain grants of options have been
made to the Board of Directors as follows. Mr. DeLape has received options to
purchase 50,000 shares of Common Stock at $3.50 per share for one year's service
as the Chairman of the Board of Directors of the Company on July 23, 1998, and
all other non-employee directors have received options to purchase 25,000 shares
at $3.50 per share for one year's service on the Board of Directors of the
Company, to be issued on July 23, 1998.
Pending before the Board of Directors, as of June 30, 1999, is a proposal
to issue options to purchase Series C Preferred Stock, exercisable at $12.25 per
share, as follows: Calbert Lai, 255,000 options; Steven Venuti, 126,000 options.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz was paid a fee of $166,365 in 1998 in compensation
for such services until December 31, 1998. As of June 30, 1999, Mr. Schultz had
received an additional $100,000 in consulting fees. Mr. Schultz is a director of
the Company. Mr. Schultz or his designees was also issued 500,000 shares of the
Company's Common Stock in August 1998, pursuant to the Plan of Reorganization.
The shares are exempt from registration under the federal securities laws, in
accordance with Section 1145 of the Bankruptcy Code. The shares are subject to
an 18-month lock-up agreement, commencing August 1, 1998. Ten percent of such
shares to date have been released from the lock-up agreement.
Since June 30, 1998, members of the I-Storm Advisory Board have each been
paid $5,000 per month for their services on the board. Members of the Advisory
Board. as of June 30, 1999 were Peter Janssen, Matthew Howard, Cary Beighley and
Joseph John. Mr. Richard Snyder also served on the Advisory Board in 1998, and
received $35,000 for his services. The following members of the Advisory Board
have received options to purchase Common Stock, exercisable at $3.50 per share,
subject to shareholder approval of the 1998B-Plan: Peter Janssen, 50,000
options; Cary Beighley, 25,000 options; Matthew Howard, 25,000 options; and
Joseph John, 25,000 options.
CONSULTING AGREEMENTS
The Company is a party to a 12-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly installments to Benchmark
for consulting services rendered to either LVL or the Company, commencing as of
March 1, 1998. As of February 1, 1999, 11 months of the Consulting Agreement
have been paid in full. Benchmark also entered into an earlier agreement, in
April 1998, to provide consulting services to LVL and its successor entity in
consideration of 600,000 shares of Common Stock, and the Board of Directors
approved the issuance of this Common Stock to Benchmark or its designees on July
23, 1998. Frank DeLape, Chairman of the Board, is the President of Benchmark
Equity Group, Inc. The Company is party to a management consulting agreement
with Matthew Howard, a director, for a fee of $5,000 per month. Mr. Howard's
consulting arrangement commenced August 1, 1998.
PROXY AGREEMENTS
In August 1998, Benchmark Equity Group, Inc. ("Benchmark") entered into
an irrevocable proxy agreement with each of Thomas A. Schultz, and/or his
designees, Calbert Lai and Stephen Venuti, which irrevocably appoints Benchmark
as a proxy with full substitution power to vote all of the Common Stock of the
Company which Calbert Lai, Stephen Venuti and Thomas A. Schultz, and/or his
designees own, for a period that commenced on August 19, 1998, and will continue
until the earlier of (i) twelve months from the date of commencement, or (ii)
the receipt by the Company of $3,000,000 in equity financing. MacKenzie Shea,
Inc., and/or its designees, also entered into an irrevocable proxy agreement
with Benchmark on substantially similar terms, which commenced March 1998 for a
period of 12 months. These proxy agreements were released upon the first closing
of the Series B Preferred Stock Offering in January 1999, at which time the
Company had raised over $3 million in equity financing.
36
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a list of exhibits filed as part of this filing. Where
so indicated by asterisk, the exhibits were previously filed and are hereby
incorporated by reference.
Exhibit No.
2.1 Plan of Merger Among LVL Advertising, Inc., LVL Interactive,
Inc. and LVL Communications Corporation effective as of July
15, 1998.*
2.2 Plan of Merger Among LVL Communications Corporation and Digital
Acquisition Corp. effective as of July 17, 1998.
2.3 Order and Plan of Reorganization of LVL Communications
Corporation as confirmed by the United States Bankruptcy Court
for the Northern District of California, dated April 16, 1998.
3.1 Certificate of Incorporation of the Company, as amended.*
3.3 By-laws, as amended.*
4.1 Certificate of Designation for Series A Preferred Stock.
4.2 Certificate of Designation for Series B Preferred Stock.
4.3 Certificate of Designation for Series C Preferred Stock.
9.1 Form of Voting Trust Agreement, dated May 6, 1998.
10.1 Employment Agreement dated July 15, 1998 between the Company
and Calbert Lai.
10.2 Employment Agreement dated July 15, 1998 between the Company
and Stephen Venuti.
10.3 Employment Agreement dated July 15, 1998 between the Company
and Timothy Cohrs.
10.4 Stock Purchase Agreement dated May 6, 1998 among I-Storm
Acquisition Corp., Digital Power Holding Company, Chiricahua
Company, Melinda Johnson and David C. Merrell.
10.5 Consulting Agreement dated March 31, 1998 between the Company
and Benchmark Equity Group, Inc.
10.6 Consulting Agreement dated December 9, 1998 between the Company
and Robert L. Tomz and Amendment thereto, dated March 19, 1999.
10.7 Form of Note between the Company and each of Four M
International, Richard David, Frederick Meyers, PacRim Access
Group, Masamitsu Ishihara, Wink Capital Management, Ltd.,
Security Trust IRA for the Benefit of Robert L. Wilson and
Philip Cory Roberts.
10.8 Form of Lock-Up Agreement
10.9 Convertible Note issued by the Company to Trident III, L.L.C.,
dated February 5,1998 and Amendment thereto, dated July 28,
1998.
10.10 Office Lease Agreement dated March 10, 1999 between the Company
and Sobrato Development Companies #850 for offices in Mountain
View, California.
10.11 I-Storm, Inc. Stock Option Plan, dated July 23, 1998.
10.12 Letter of Intent with Oracle, dated May 5, 1998
10.13 Preliminary Letter of Intent with Philips Mobile Computing
Group, dated April 28, 1998
10.14 Letter of Understanding with Sun Microsystems, Inc.
10.15 Letter of Interest with Garden Botanika, dated July 1998
37
<PAGE>
16.1 July 23, 1998 Board resolution approving change in Independent
Public Accountant*.
16.2 Letter on change in certifying accountant
21 Subsidiaries of the registrant.
27 Financial data schedule.
- --------------
* The foregoing documents were filed with the Company's form 8-K dated August
21, 1998.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended December 31, 1998. Subsequent to year end, the Company filed a
report on Form 8-K on March 4, 1999. Such report covered the Company's closing
of a private placement of Series B Preferred Stock. The Company also filed a
Form 8-K on September 21, 1999. Such report reflected, among other items, the
closing of the LVL Bankruptcy Proceeding by the United States Bankruptcy Court
for the Northern District of California by reason of substantial payments made
by the Company under the Plan of Reorganization. Concurrent with this filing on
December16, 1999, the Company is filing a report on Form 8-K to report the
change in its certifying accountant.
* * * * *
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
38
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
I-STORM, INC.
(Registrant)
Dated: January 6, 2000 By: /s/ Calbert Lai
-----------------------------------
Calbert Lai, President and Director
In accordance with Section 13 of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Calbert Lai President and Director January 6, 2000
- -------------------------- --
Calbert Lai
/s/ Calbert Lai Treasurer and Chief January 6, 2000
- -------------------------- Financial Officer --
Calbert Lai
/s/ Frank DeLape Director January 6, 2000
- -------------------------- --
Frank DeLape
/s/ Thomas Schultz Director January 6, 2000
- -------------------------- --
Thomas Schultz
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To I-Storm, Inc.:
We have audited the accompanying consolidated balance sheets of I-Storm, Inc. (a
Nevada corporation in the development stage) as of December 31, 1998, July 17,
1998, and December 31, 1997, and the related consolidated statements of
operations and comprehensive loss, shareholders equity (deficit) and cash flows
for the periods then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-Storm, Inc. as of December
31, 1998, July 17, 1998, and December 31, 1997, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company emerged from Chapter 11 bankruptcy effective
July 17, 1998 and is in the development stage with no significant operating
results to date. The bankruptcy proceedings significantly affected the Company's
capital structure, liquidity, and capital resources. These factors and others
discussed in Note 1 raise substantial doubt about the ability of the Company to
continue as a going concern and about the ability of the Company to realize its
Reorganization Asset. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San Jose, California
July 16, 1999
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998, JULY 17,1998, AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
Post Emergence Predecessor
-------------- -----------
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5 $ 295 $ --
Accounts receivable, net of allowance for doubtful
accounts of $51, $50 and $31 44 86 85
Factored accounts receivable, net of allowance for
doubtful accounts of $349, $66, and $0 105 508 571
Prepaid expenses and other current assets 158 92 122
---------------------------------------------
Total current assets 312 981 778
Property and equipment, net 81 122 974
Other assets 32 54
Reorganization asset, net of amortization of $147, $0, and $0 3,060 3,131 --
---------------------------------------------
Total assets $ 3,485 $ 4,234 $ 1,806
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ -- $ 32 $ --
Notes payable 1,197 100 157
Factoring liability 1,144 700 821
Accounts payable 912 417 7,151
Accrued liabilities 504 690 605
---------------------------------------------
Total current liabilities 3,757 1,939 8,734
---------------------------------------------
Long-term notes payable (Note 4) 260 528 --
Capital lease obligation, less current portion -- -- 2
---------------------------------------------
Total noncurrent liabilities 260 528 2
---------------------------------------------
Redeemable common stock, at $1.00 per share, 600,000 shares outstanding at
December 31, 1998 and July 17, 1998 and
none outstanding at December 31, 1997 (Note 6) 600 600 --
---------------------------------------------
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value and paid in capital Series A cumulative
convertible preferred stock;
liquidation preference of $4,002:
Designated--600 share; outstanding--0 shares
Subscribed--600 shares at December 31, 1998 and
July 17, 1998 and 0 shares at December 31, 1997 600 600 --
Series B cumulative convertible preferred stock:
Designated--1,700 shares; outstanding--none -- -- --
Series C cumulative convertible preferred stock:
Designated--1,225 shares; outstanding--none -- -- --
Common stock, $0.01 par value:
Authorized--25,000
Outstanding--3,726 shares in 1998, 1,000 shares at July
17, 1998, and 11,590 shares in 1997
Subscribed 1,482 shares in 1998, 2,040 shares at July
17, 1998, none in 1997 51 30 2,342
Notes receivable from holders of common stock -- -- (2,332)
Subscribed warrants to purchase common stock 110 47 --
Additional paid-in capital 867 490 --
Accumulated deficit (2,760) -- (6,940)
--------------------------------------------
Total shareholders' equity (deficit) (1,132) 1,167 (6,930)
--------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 3,485 $ 4,234 $ 1,806
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Post-Emergence Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Revenues 837 2,076 6,108
Costs and expenses:
Cost of revenues 911 1,563 4,106
Selling, general, and administrative 1,892 2,672 4,440
Research and development 429 -- --
Amortization of reorganization asset 147 -- --
----------------------------------------------------------
Total operating expenses 3,379 4,235 8,546
----------------------------------------------------------
Loss from operations (2,542) (2,159) (2,438)
Interest expense (218) -- (320)
Other income (expense), net -- (264) (114)
----------------------------------------------------------
Total other income (expense) (218) (264) (434)
----------------------------------------------------------
Net loss and comprehensive loss (2,760) (2,423) (2,872)
==========================================================
Net loss per share:
Basic and diluted (0.56) (0.21) (0.25)
==========================================================
Shares used in computing net loss per share:
Basic and diluted 4,914 11,590 11,590
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Common Stock Purchase
----------------------------------------------- Common Notes
PREDECESSOR Shares Amount Shares Amount Stock Receivable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- $ -- 11,590 $ 2,342 $ -- $ (2,332)
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 11,590 2,342 -- (2,332)
Net loss -- -- -- -- -- --
Issuance of new preferred and common stock and
warrants in accordance with the POR 600 600 3,040 30 47 --
Application of fresh-start accounting -- -- (11,590) (2,342) -- 2,332
------------------------------------------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 600 600 3,040 30 47 --
Issuance of common stock for services -- -- 2,000 20 -- --
Issuance of common stock related to
debt financing -- -- 128 1 -- --
Issuance of warrants related to debt
financing -- -- -- -- 73 --
Exercise of warrants -- -- 40 -- (10) --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1998 600 $ 600 5,208 $ 51 $ 110 $ --
==============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Additional Shareholders'
Paid-in Accumulated Equity
PREDECESSOR Capital Deficit (Deficit)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ -- $ (4,068) $ (4,058)
Net loss -- (2,872) (2,872)
----------------------------------------------
Balance, December 31, 1997 -- (6,940) (6,930)
Net loss -- (2,423) (2,423)
Issuance of new preferred and common stock and
warrants in accordance with the POR 490 -- 1,167
Application of fresh-start accounting -- 9,363 9,353
----------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 490 -- 1,167
Issuance of common stock for services 336 -- 356
Issuance of common stock related to
debt financing 31 -- 32
Issuance of warrants related to debt
financing -- -- 73
Exercise of warrants 10 -- --
Net loss -- (2,760) (2,760)
----------------------------------------------
Balance, December 31, 1998 $ 867 $ (2,760) $ (1,132)
==============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post Emergence
Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,760) $ (2,423) $ (2,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets -- 30 200
Depreciation and amortization 192 88 252
Forgiveness of current obligations in exchange for fixed
assets -- 738 --
Valuation of common stock issued for services 356 -- --
Provision for bad debts 284 85 --
Changes in assets and liabilities:
Accounts receivable 42 (20) 2,698
Unbilled receivables -- -- 98
Factored accounts receivable 120 (3) (571)
Prepaid expenses and other assets (3) 84 34
Accounts payable (756)
Deferred revenue 495 655 2,025
Accrued liabilities (16) 149 (1,429)
------------------------------------------------------
Net cash used in operating activities (1,290) (617) (321)
------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (8) (4) (287)
------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 554 528 --
Repayment of notes payable -- (57) (52)
Factoring liability, net 444 (121) 612
Payments on capital leases -- (34) (125)
Proceeds from issuance of redeemable common stock -- 600 --
Payment on notes receivable from shareholders -- -- 100
Proceeds from the exercise of warrants 10 -- --
------------------------------------------------------
Net cash provided by financing activities 1,008 916 535
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (290) 295 (73)
Cash and cash equivalents at beginning of period 295 -- 73
------------------------------------------------------
Cash and cash equivalents at end of period $ 5 $ 295 $ --
======================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Valuation of common stock related to debt financing $ 32 $ -- $ --
Valuation of warrants issued in conjunction with debt $ 63 $ -- $ --
Notes payable issued to secured creditors for pre-petition
claims and taxes (See Note 5) $ 275 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF THE COMPANY:
COMPANY FORMATION AND FINANCIAL REORGANIZATION
I-Storm, Inc. (the "Company" or "I-Storm") was created through the merger of LVL
Communications Corporation ("LVL") and Digital Acquisition Corporation, a wholly
owned subsidiary of Digital Power Holding Company ("Digital"), a Nevada public
shell corporation on July 17, 1998, resulting in LVL becoming a wholly owned
subsidiary of Digital. Digital has been renamed "I-Storm, Inc." The merger was
accounted for as a reverse acquisition under the purchase method with LVL being
the surviving entity.
Since December 1989, Digital has not engaged in any material business
operations. Its only activities since that time have consisted of restoring and
maintaining its good standing in the State of Nevada.
I-Storm is an Internet advertising, marketing and communications agency, and the
developer of the "I-Storm CyberStore" concept, a joint venture program to
finance, design, develop, and operate electronic commerce storefronts in
partnership with brand-name consumer and technology product companies as of
December 31, 1998. LVL has developed electronic and on-line commerce
("E-commerce") on behalf of international manufacturing and technology
corporations.
On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL Advertising,
Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a voluntary petition in
the United States Bankruptcy Court for the Northern District of California
("Bankruptcy Court") seeking protection under Chapter 11 of the U.S. Bankruptcy
Code. The Chapter 11 proceedings of the Companies were jointly administered by
the Bankruptcy Court. LVL and its subsidiaries operated their business as
debtors-in-possession, subject to Bankruptcy Court approval for certain
transactions, while they developed a reorganization plan to restructure LVL. On
April 16, 1998, the Bankruptcy Court confirmed the First Amended Plan of
Reorganization ("POR") which became effective on July 17, 1998. The principal
terms of the POR are as follows:
1. LVLA and LVLI merged into LVL.
2. LVL became a wholly owned subsidiary of Digital.
3. The outstanding shares of common stock of LVL ("Old Common Stock")
and options to purchase Old Common Stock were canceled effective
July 17, 1998.
4. Certain founders and shareholders of LVL received 600,000 shares of
common stock of the Company, subject to certain restrictions on the
sale and disposition of these shares.
F-5
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
5. Certain secured claims are to be repaid by the Company pursuant to
the original terms of the agreements or will be repaid over five
years in equal quarterly installments at an annual interest rate of
10%.
6. An investor in LVL, Trident III, LLC ("Trident") that provided
$600,000 in pre-confirmation bridge financing was issued 600,000
shares of redeemable non-voting common stock and 440,000 shares of
non-redeemable common stock.
7. All unsecured claims will receive a pro rata portion of 600,000
shares of Series A Cumulative Convertible Preferred Stock ("Series
A"). Claims of less than $5,000 may elect to receive 10% of their
claim in cash in lieu of receiving shares of Series A ("Cash
Option"). Claims exceeding $5,000 may elect to reduce their claim
to $5,000 and receive $500 in lieu of receiving shares of Series
A. The pool of 600,000 shares of Series A was reduced by the
percentage dollar amount of claims electing the Cash Option.
8. The Company issued warrants to purchase common stock to certain
investors and service providers during the reorganization.
The Company also concluded the following additional transactions relating to the
restructuring of the Company:
1. Trident provided $228,000 in post-confirmation bridge financing and
received 91,200 shares of non-voting common stock.
2. The Company has also received $100,000 in pre-confirmation bridge
financing and $300,000 in post-confirmation bridge financing from
other investors. The Company issued warrants to purchase 80,000
shares of common stock at $0.50 per share and 120,000 shares of
common stock at $0.001 per share, respectively, in conjunction with
these financings.
3. I-Storm issued warrants to purchase 290,000 shares of common stock
at $0.25 per share in conjunction with post-confirmation bridge
financing of $725,0000.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Chapter 11 proceedings significantly affected I-Storm's capital structure,
liquidity and capital resources. During 1997 and 1998, the Company's operations
generated substantial losses. I-Storm expects that in the near term, it will
continue to sustain losses from operations (before giving effect to the non-cash
charges that it will incur with respect to the amortization of a $3.1 million
bankruptcy Reorganization Asset over the next ten years).
The Company is in the development stage, has yet to generate any significant
revenues and has no assurance of future revenues. The Company is subject to the
risks and challenges associated with other companies at a similar stage of
development, including: dependence on
F-6
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
key individuals, successful development, marketing and sales of products and
services, and competition from larger companies with greater financial,
technical, management, marketing, and sales resources.
In order to achieve successful operations, the Company will require additional
capital to sustain and expand its business. I-Storm has raised net proceeds of
approximately $5.7 million since December 31, 1998. I-Storm is currently seeking
additional equity financing and is seeking to list its stock on a
nationally-recognized exchange. There can be no assurance that I-Storm will be
able to obtain financing or that the terms of the financing will be favorable to
I-Storm. These factors raise substantial doubt about the ability of I-Storm to
continue as a going concern and about the ability of I-Storm to realize its
Reorganization Asset. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In addition to the need for additional financing, I-Storm is subject to a number
of other risk factors including, but not limited to, a limited operating history
as a reorganized entity; significant concentration of revenue from a few
customers; highly competitive markets with limited barriers to entry; and
implementation of its new E-Commence CyberStore concept.
FRESH START ACCOUNTING
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," prescribes the use of "fresh start
accounting" when the sum of the allowed claims plus post-petition liabilities
exceeds the value of pre-confirmation assets and the entity experiences a change
in control as pre-reorganization equity holders effectively receive less than
50% of new common stock issued pursuant to the POR. Under these circumstances, a
new reporting entity is created and assets and liabilities should be recorded at
their fair values. This accounting treatment is referred to as "fresh start
reporting."
Distributions in settlement of allowed claims, other transactions pursuant to
the POR and fresh start reporting adjustments have been applied to I-Storm's
pre-confirmation balance sheet resulting in the accompanying July 17, 1998
consolidated balance sheet of I-Storm. Since fresh start accounting results in a
new reporting entity, amounts included in the accompanying consolidated
financial statements as of or subsequent to July 17, 1998 are not intended to be
comparable to financial statements as of or for any previous period.
Fresh start reporting equity value was determined in good faith by the Board of
Directors of I-Storm. I-Storm has valued the Series A Cumulative Convertible
Preferred Stock at $1.00 per share, representing proceeds to the unsecured
creditors of approximately $0.10 per $1.00 of liabilities. Redeemable common
stock has also been valued at $1.00 based on the redemption features of the
common stock. Common stock has been valued at $0.25 per share based on the value
of the last transaction involving Digital's common stock. Warrants to purchase
common stock to be issued pursuant to the POR have been valued at approximately
$0.13 based on an option-pricing model.
F-7
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The reorganization and the adoption of fresh start reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet as of July 17,
1998 (in thousands):
UNAUDITED INFORMATION
<TABLE>
<CAPTION>
Reorganization and
Predecessor Fresh Start Adjustments Reorganized
Company ----------------------- Company
July 17, 1998 Debit Credit July 17, 1998
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Current assets: $ 1,360 $ -- $ 379 (a) $ 981
Property and equipment, net 307 -- $ 185 (b) 122
Reorganization asset -- 3,131 (c) -- 3,131
--------------- ------------- -------------- -----------------
Total assets $ 1,667 $ 3,131 $ 564 $ 4,234
=============== ============= ============== =================
Liabilities and equity: $ 9,574 $ 7,635 (d) -- 1,939
Long-term notes payable 403 -- 125 (e) $ 528
Redeemable common stock -- -- 600 (f) 600
Preferred A -- -- 600 (g) 600
Common 11 -- 19 (h) 30
Warrants -- -- 47 (i) 47
Paid in capital 724 234 (j) -- 490
Accumulated deficit (9,045) -- 9,045 (k) --
--------------- ------------- -------------- -----------------
Total liabilities and equity $ 1,667 $ 7,869 $ 10,436 $ 4,234
=============== ============= ============== =================
</TABLE>
Explanation of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to fair market value.
(c) To establish the reorganization value in excess of identifiable assets
as follows (in thousands):
<TABLE>
<S> <C>
New debt $ 125
New equity 1,266
--------------
Reorganization value 1,391
Plus: Fair value of liabilities 2,842
Less: Fair value of assets (1,102)
--------------
$ 3,131
==============
</TABLE>
(d) To reflect the cancellation of old accounts payable and notes payable.
(e) To reflect the addition of bridge debt pursuant to the Reorganization
Plan.
F-8
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(f) To reflect the issuance of 600,000 shares of Redeemable Common pursuant
to the Reorganization Plan.
(g) To reflect the issuance of 600,000 shares of Convertible Preferred A
pursuant to the Reorganization Plan.
(h) To reflect the net issuance of Common shares pursuant to the
Reorganization Plan.
(i) To reflect the issuance of 350,000 shares of Common Warrants pursuant
to the Reorganization Plan.
(j) To reflect net adjustments to Capital pursuant to the Reorganization
Plan.
(k) To reflect the elimination of stockholders' deficit of the Predecessor
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the activities of
I-Storm and its wholly-owned subsidiary after elimination of all intercompany
accounts and transactions.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, I-Storm considers all highly
liquid investments purchased with original maturities of three months or less to
be cash and cash equivalents. Cash and cash equivalents consist of amounts on
deposit at a commercial bank.
I-Storm paid cash of $80,360, $57,797 and $208,328, for interest in the periods
ended December 31, and July 17, 1998, and the year ended December 31, 1997.
I-Storm paid cash of $0, $4,176 and $11,028, for taxes in the periods ended
December 31, 1998 and July 17, 1998, and the year ended December 31, 1997.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject I-Storm to concentrations of
credit risk consist principally of accounts receivable. I-Storm performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
F-9
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets.
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 61 $ 61 $ 141
Furniture and fixtures 61 61 241
Leasehold improvements 0 0 875
---------------------------------------------------
122 122 1,257
Less: Accumulated depreciation (41) 0 (283)
---------------------------------------------------
$ 81 $ 122 $ 974
===================================================
</TABLE>
AMORTIZATION OF REORGANIZATION ASSET
At July 17, 1998, the reorganization value of I-Storm in excess of its net
assets was determined to be $3,131,000. This intangible asset was classified as
a reorganization asset ("Reorganization Asset") in the accompanying consolidated
balance sheet of I-Storm and will be amortized on a straight-line basis over ten
years. As of December 31, 1998, the value of the Reorganization Asset was
approximately $3,060,000. Pursuant to Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," the
Reorganization Asset was determined by discounting future cash flows for I-Storm
at rates reflecting the business and financial risks involved and it
approximates the amount a willing buyer would pay for the assets of the Company
immediately after the restructuring. The carrying value of the Reorganization
Asset will be reviewed periodically for impairment, and if the facts and
circumstances suggest that it may not be recoverable, as determined based on the
undiscounted cash flows of I-Storm over the remaining amortization period, the
carrying value of the Reorganization Asset will be adjusted in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
F-10
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Professional fees $ 175 $ 367 $ 176
Payroll and payroll-related liabilities 139 162 115
Sales taxes 0 35 17
Other accrued liabilities 190 158 265
-----------------------------------------------------
$ 504 $ 722 $ 573
=====================================================
</TABLE>
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect to employ the method prescribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method. I-Storm has elected to account for its stock-based
compensation arrangements under the provisions of APB 25, and accordingly, it
has included the pro forma disclosures required under SFAS No. 123 in Note 8.
REVENUE RECOGNITION
I-Storm's revenues consist principally of services related to development and
maintenance of web sites. I-Storm recognizes revenue as the services are
provided. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is accrued for the
excess.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which I-Storm adopted beginning on January 1, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income (loss) and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period other than
transactions with shareholders ("comprehensive income "). Comprehensive income
(loss) is the total of net income (loss) and all other non-owner
F-11
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
changes in equity. For the periods ended December 31, 1998 and July 17, 1997,
and the year ended December 31, 1997, I-Storm's comprehensive loss was equal to
net loss.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND
DILUTED NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss per common
share has been computed using the weighted average number of shares of common
stock outstanding during the period less shares subject to repurchase. Basic and
diluted pro forma net loss per common share, as presented in the statements of
operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock if anti-dilutive (using the
if-converted method) from the original date of issuance.
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended
December 31, July 16, December 31,
(in thousands) 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
Basic and diluted: $ (2,760) $ (2,423) $ (2,872)
Weighted average shares used in computing basic
and diluted net loss per common share $ 4,914 $ 11,590 $ 11,590
=====================================================
Basic and diluted net loss per common share $ (0.56) $ (0.21) $ (0.25)
=====================================================
</TABLE>
SEGMENT REPORTING
During 1998, I-Storm adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, I-Storm has only one business segment, the
development and implementation of the eStore concept.
During the periods ended December 31, 1998 and July 17, 1998, and the year ended
December 31, 1997, I-Storm's revenue was generated in the United States.
F-12
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for I-Storm). This Statement
will not have a material impact on the financial condition or results of the
operations of I-Storm.
3. FACTORED ACCOUNTS RECEIVABLE:
I-Storm has entered into a factoring agreement with a financial institution.
Under this arrangement, I-Storm sells to the financial institution all
third-party receivables that meet certain criteria outlined in the agreement.
The financial institution has the right to charge back any receivables that are
not paid within 90 days of the invoice date to I-Storm. As I-Storm does not
surrender control over the factored receivables, the amounts received from the
transfer are treated as secured borrowings until either payment is received by
the financial institution or the receivable is put back to I-Storm. The
factoring agreement expired on March 25, 1999. As of December 31, 1998, July 17,
1998, and December 31, 1997, I-Storm had $1,144,000, $700,000, and $821,000,
respectively, outstanding in factoring liability related to the factoring
agreement. Subsequent to December 31, 1998, I-Storm has completely paid off the
factoring liability.
The following table shows the component elements of factored accounts receivable
from customers (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Factored accounts receivable:
Billed $ 454 $ 512 $ 477
Unbilled -- 62 94
-------------------------------------------------------
454 574 571
Less: Allowance for doubtful accounts (349) (66) --
-------------------------------------------------------
$ 105 $ 508 $ 571
=======================================================
</TABLE>
F-13
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Factored unbilled accounts receivable represents revenue recognized on a
percentage-of-completion basis for which billings had not been presented to the
customer because the amounts were not billable at the balance sheet date. The
unbilled accounts receivable are generally billable upon completion of the
respective project.
4. NOTES PAYABLE:
As of December 31, 1998, I-Storm had a note payable agreement with Trident,
under which I-Storm was able to borrow up to $1 million at 10% per annum. As
discussed in Note 1, Trident provided $600,000 in pre-confirmation bridge
financing and $228,000 in post-confirmation bridge financing. In consideration
for the pre-confirmation bridge financing, I-Storm issued Trident 600,000 shares
of redeemable common stock and 440,000 shares of non-redeemable common stock. In
partial consideration for the post-confirmation bridge financing, Trident has
been issued additional 91,200 shares of non-redeemable non-voting common stock.
At December 31, 1998, I-Storm had $321,000 outstanding under this note payable
agreement classified as notes payable in the accompanying balance sheet and
$600,000 outstanding classified as redeemable common stock. Subsequent to
December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm had notes payable agreements with certain
individuals in amounts aggregating $250,000 at 10% per annum. The notes are
collateralized via a security interest in all of I-Storm's assets, subject to
certain other security interests. In conjunction with the issuance of the notes
payable, I-Storm issued warrants to purchase 60,000 shares of common stock in
I-Storm exercisable at $0.50 per share. The warrants expire on March 31, 2003.
At December 31, 1998, the outstanding balance under these agreements was
$250,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $275,000 at 10% per annum. I-Storm issued
warrants to purchase 50,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$275,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $300,000 at 10% per annum. I-Storm issued
warrants to purchase 120,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$300,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
All of the notes payable agreements listed above expire upon the earlier of: (i)
various dates from March 31, 1999 through October 31, 1999; (ii) the date of
I-Storm's receipt of $3 million
F-14
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
from one or more debt or equity financings; or (iii) upon the sale, transfer or
disposition of any or all of the assets of I-Storm.
As of December 31, 1998, I-Storm had federal and state payroll and sales taxes
due totaling $202,000. As a result of the Chapter 11 filing, I-Storm has five
years to pay the taxes.
Under the POR, the Company is required to pay secured claims totaling $73,000,
including principal and interest (10% per annum), over a period of five years,
in equal quarterly installments.
I-Storm's notes payable obligations described above are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
(in thousands)
------------------------
<S> <C>
Note payable agreement with Trident at 10% per annum $ 321
Notes payable agreements with certain individuals at
0% per annum 861
Federal and State payroll and sales taxes 202
Secured creditors 73
-----------------
Total debt outstanding 1,457
Less: Current portion 1,197
-----------------
Total long-term notes payable $ 260
=================
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
As of December 31, 1998, I-Storm leases its facility on a month to month basis.
There are no future minimum required payments for this facility.
In March 1999, I-Storm entered into a two year operating lease for a new
facility. The future minimum required payments under this lease are as follows
(in thousands):
1999 $ 253
2000 348
2001 29
-----------
$ 630
===========
In conjunction with I-Storm's bankruptcy proceedings in 1998, I-Storm's
creditors had filed claims of approximately $621,000 as secured creditors.
Subsequent to December 31, 1998, claims for approximately $548,000 were
converted to unsecured claims and were allocated their pro rata portion of
Series A Cumulative Convertible Preferred Stock. The remaining
F-15
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
claims of $73,000 will be repaid in equal quarterly installments over five years
at 10% per annum (see Note 4).
6. REDEEMABLE COMMON STOCK:
In conjunction with the POR, I-Storm issued 600,000 shares of redeemable common
stock to Trident in consideration for $600,000 of pre-confirmation bridge
financing. These shares are redeemable at $1.00 per share, at Trident's option,
in the event that I-Storm raises $3 million in debt or equity financing.
Subsequent to December 31, 1998, Trident elected to convert the redeemable
common stock into non-redeemable common stock.
7. PREFERRED STOCK:
As of December 31, 1998, I-Storm was authorized to issue 2,000,000 shares of
preferred stock of which 600,000 shares are designated Series A Cumulative
Convertible Preferred Stock ("Series A"). Pursuant to the POR, these shares will
be issued on a pro rata basis to the class of unsecured creditors. These shares
will be issued upon the identification of these claims and the determination of
shares to be issued or the Cash Option elected, and have been reflected as
subscribed shares in the accompanying balance sheet. The shares of Series A to
be issued pursuant to the POR have been valued at $1.00 per share as determined
in good faith by the Board of Directors. Pursuant to the POR, these shares may
not be transferred or sold until twelve months after the merger of LVL into
Digital.
The rights, restrictions, and preferences of Series A are as follows:
- The holders of Series A shall, upon the vote of the majority of the
Board of Directors, be entitled to receive, out of funds legally
available therefore, cumulative annual dividends at a rate of $0.05 per
annum per share, respectively, prior and in preference to any payment
of any dividend on the common stock, payable in cash or common stock at
the option of the Board of Directors. Such dividends shall be paid when
and as declared by the Board of Directors, and unpaid dividends shall
accumulate for the benefit of the holders. The dividend rights and
preferences of the Series A shall be senior to those of common stock.
After the dividend preferences of the Series A due in a given year have
been paid in full, all remaining dividends in such year, if any, shall
be paid according to preference to remaining equity interests.
- In the event of any liquidation, dissolution, or winding up of I-Storm,
or the sale, merger, or combination of I-Storm, a public offering in
excess of $25 million, and merger or consolidation of I-Storm in which
its shareholders do not retain a majority of the voting power in the
surviving corporation, or a sale of substantially all of I-Storm's
assets (singularly or collectively referred to as a "Liquidation
Preference Event"), the holders of the Series A will be entitled to
receive an amount equal to $6.67 per share for the Series A, plus an
amount equal to all declared but unpaid dividends (the "Preference
Amount"). After the Preference Amount on all outstanding shares of
F-16
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Series A has been paid, any remaining funds and assets of I-Storm
legally available for distribution shall be paid pro rata solely among
the holders of common stock. If I-Storm has insufficient assets to
permit payment of the Preference Amount in full to all holders of
Series A, then the assets of I-Storm shall be distributed ratably to
the holders of Series A in proportion to the Preference Amount each
such holder would have been entitled to receive.
- The Series A shall be redeemable in part or in full at the option of
I-Storm on thirty days advance written notice to the holders of Series
A at a redemption price of $6.67 per share. Upon receipt of notice of
I-Storm's intention to redeem the Series A, each holder of Series A
shall have an option to convert to common stock as described below. Any
partial redemption shall be made on a pro rata basis.
- Each holder of Series A shall have the right to convert the Series A
into shares of common stock in part or in full at any time, including
within thirty days after notice by I-Storm of its intention to redeem
the Series A or of a Liquidation Preference Event. The initial
conversion rate for the Series A shall be one-to-one. All rights
incident to a share of Series A (including but not limited to rights to
any declared but unpaid dividends) will terminate automatically upon
any conversion of such share into common stock. The number of shares of
common stock issuable upon conversion of each share of Series A shall
be subject to adjustment from time to time upon the occurrence of
certain events.
- The holders of Series A shall have the right to vote as a class on (i)
the merger, sale, liquidation, or dissolution of I-Storm, (ii) a sale
of all or substantially all of I-Storm's assets, (iii) any increase in
the number of authorized shares of any class or series of equity
securities of I-Storm, (iv) creation of any new class or series of
equity securities in LVL, (v) any increase in the number of members of
the Board of Directors of I-Storm and LVL, and (vi) election of one
member of the Board of Directors of I-Storm and LVL.
8. COMMON STOCK:
At December 31, 1998, common stock consists of 3,326,000 shares outstanding, and
an additional 1,482,000 shares subscribed. The subscribed shares consist of
shares to be issued pursuant to the POR that had not been issued as of December
31, 1998. The Board of Directors authorized the issuance of these shares on July
23, 1998. The shares of common stock to be issued pursuant to the POR have been
valued at $0.25 per share, as determined in good faith by I-Storm's Board of
Directors. Each issued and outstanding share of common stock entitles the holder
to one vote on all matters submitted to a vote of stockholders. Upon any
liquidation, dissolution or winding up of the affairs of I-Storm, holders of
common stock are entitled to receive pro rata all of the assets available for
distribution to shareholders, only after payment or provision for payment of all
debts and other liabilities of I-Storm, including a pro-rata distribution of
assets, first, to the holders of Series A.
F-17
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Shares of common stock issued pursuant to the POR and shares issued upon the
exercise of warrants issued pursuant to the POR may not be transferred or sold
within six months of the merger of LVL and Digital for holders of common stock
that had provided financing to I-Storm. Shares may not be transferred or sold
within eighteen months of the merger of LVL and Digital for holders of common
stock that had not provided financing to I-Storm. The Board of Directors may
release all or a portion of these restrictions at its discretion.
1998 STOCK OPTION PLAN
As provided in the POR and subject to stockholder approval, in 1998, I-Storm
established the 1998 Stock Option Plan (the "1998 Option Plan") covering
1,400,000 shares of common stock. Options granted under the 1998 Option Plan may
be either incentive stock options or nonstatutory stock options, as designated
by the Board of Directors. Options granted under the 1998 Option Plan expire on
the tenth anniversary of the date of grant. The 1998 Option Plan provides that
the exercise price of each incentive stock option will be no less than 100% of
the fair market value of the common stock at the date of the grant. The exercise
price of each nonstatutory stock option will be no less than 85% of the fair
market value of the common stock at the date of the grant. The exercise price to
an optionee who possesses more than 10% of the total combined voting power of
all classes of stock will be no less than 110% of the fair market value of the
common stock at the date of the grant and is not exercisable after the
expiration of five years from the date of grant. Vesting provisions of
individual options under the 1998 Option Plan may vary as the Board of Directors
has the authority to set exercise dates, payment terms and other provisions for
each grant. As of December 31, 1998, there were no shares outstanding under the
1998 Option Plan. In accordance with APB No. 25, no compensation expense has
been recognized related to options granted to employees, as there were no
options granted to employees as of December 31, 1998.
SUBSCRIBED WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued 350,000 warrants to purchase common stock at $0.50 per share
to creditors and to other entities and individuals as specified by the POR. The
warrants are exercisable for a period of five years commencing from their issue
date pursuant to the POR. The Board of Directors authorized the issuance of
these warrants on July 23, 1998. I-Storm has valued these warrants at
approximately $0.13 per share based on an option pricing model.
WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued warrants to purchase 290,000 shares of common stock at an
exercise price of $0.001 per share in connection with a bridge financing of
$825,000. The warrants are exercisable for a period of five years commencing
from their issue date. I-Storm has valued these warrants at approximately $0.25
per share based on an option pricing model. As of December 31, 1998, warrants
for 40,000 shares have been exercised.
F-18
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
COMMON STOCK ISSUED FOR SERVICES
During 1998, the Board of Directors authorized the issuance of 2,000,000 shares
of common stock valued at $0.25 per share to entities in consideration for
financial services and financing provided to I-Storm.
RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance:
Subscribed common stock 2,040,000
1998 Stock Option Plan 1,400,000
Conversion of preferred stock 600,000
Warrants 600,000
---------------
4,640,000
===============
9. INCOME TAXES:
I-Storm accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes." A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding the realization of the assets
based upon the lack of profitability in recent years, the uncertainty of future
profitability, and limitations on the utilization of net operating losses due to
I-Storm's reorganization.
10. RELATED PARTIES:
The Company entered into a twelve-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay a total of $175,000 in twelve monthly installments
to Benchmark for merger and acquisitions consulting services rendered to either
LVL or the Company, commencing as of March 1, 1998. Benchmark also entered into
an agreement in April 1998, to provide consulting services to LVL and its
successor entity in consideration of 600,000 shares of unregistered Common
Stock, and the Board of Directors approved the issuance of this Common Stock to
Benchmark or its designees on August 1, 1998, subject to a month lock-up
agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a $20,000
cash fee in 1998 in full compensation for such services. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
F-19
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In September 1997, the Company engaged Thomas Schulz as a consultant to assist
the Company in structuring a reorganization and post-organization operating
entity. Mr. Schulz or its designees were issued 500,000 shares of the Company's
Common Stock in August, 1998, and Mr. Schulz also was paid a fee for such
services. Mr. Schulz is a director of the Company. The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In August 1998, the Company engaged Weatherly Securities Corp. ("Weatherly") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of
1,000,000 shares of Common Stock of the Company, valued at $0.25 per share. The
shares of Common Stock issued to Weatherly were fully vested fully as of August
1, 1998, are unregistered shares and are subject to an eighteen month lock-up
agreement.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to provide
investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to Pound were fully vested as of August 1, 1998, are
unregistered shares and are subject to an eighteen month lock-up agreement.
Robert Tomz entered into a consulting arrangement with the Company on December
8, 1998 whereby he was entitled to receive monthly compensation of $8,000 a
month and warrants to purchase 14,000 shares of Common Stock, exercisable at
$2.00 per share each month for a period of twelve months commencing January 11,
1999. Mr. Tomz also served briefly as Acting Chief Financial Officer of the
Company from January 1 to March 15, 1999. Mr. Tomz and the Company terminated
this consulting arrangement on June 15, 1999, and renegotiated the consulting
fee so that Mr. Tomz received in total $90,000 and 84,000 warrants to purchase
Common Stock of the Company exercisable at $2.00 per share.
Pursuant to the Plan of Reorganization, the Company has issued 297,642 shares of
Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000 shares of
Common Stock to Thomas A. Schulz, or his designees, as set forth below. Further,
Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a director, has been
issued 557,800 shares of Common Stock. Additionally, Mr. DeLape, has received
options to purchase 50,000 shares of Common Stock at $3.50 per share for one
year's service as the Chairman of the Board of Directors of the Company on July
23, 1999, and all other non-employee directors have received options to purchase
25,000 shares at $3.50 per share for one year's service on the Board of
Directors of the Company, to be issued on July 23, 1999.
F-20
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The Company is a party to a twelve month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly installments to Benchmark
for consulting services rendered to either LVL or the company, commencing as of
March 1, 1998. As of February 1, 1999, 11 months of the Consulting Agreement has
been paid in full. Benchmark also entered into an earlier agreement, in April
1998, to provide consulting services to LVL and its successor entity in
consideration of 600,000 shares of Common Stock, and the Board of Directors
approved the issuance of this Common Stock to Benchmark or its designees on July
23, 1998. Frank DeLape, Chairman of the Board, is the President of Benchmark
Equity Group, Inc. The Company has a management consulting agreement with
Matthew Howard, a director, for a fee of $5,000 per month. Mr. Howard's
consulting arrangement commenced August 1, 1998.
11. SUBSEQUENT EVENTS:
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,396,927 in
connection with the issuance of 407,900 shares of Series B Cumulative
Convertible Preferred Stock ("Series B") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share. The Series B shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,004,000 in
connection with the issuance of 371,429 shares of Series C Cumulative
Convertible Preferred Stock ("Series C") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share. The Series C shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.
Subsequent to December 31, 1998, the Board of Directors authorized the issuance
of options to purchase 50,000 shares of common stock to the Chairman of the
Board of Directors. Each director other than the Chairman shall be granted
options to purchase 25,000 shares of common stock. These options will be granted
annually for each full year of service and vest one year from the date of grant.
The exercise price of options granted for the current year of service is $3.50
per share. The Board of Directors also authorized the issuance of options to
purchase 50,000 and 25,000 shares of common stock to the Chairman and members of
the Advisory Board of I-Storm, respectively, under the same terms as the options
granted to the Chairman and members of the Board of Directors. Individuals may
only receive options as a member of either the Board of Directors or the
Advisory Board, but not as a member of both boards.
F-21
EXHIBIT 2.3
William C. Lewis, Esq., Bar No. 77193
Sally A. Morello, Esq., Bar No. 122814
LAW OFFICES OF WILLIAM C. LEWIS
510 Waverley Street
Palo Alto, CA 94301-2009
Telephone: (650) 322-3300
Facsimile: (650) 327-9720
Attorneys for Debtors
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
) Case Nos:
)
In re: )
)
LVL COMMUNICATIONS ) 985-2216 MM
CORPORATION, LVL ) 985-2219 MM
ADVERTISING, INC., and LVL ) 985-2222 MM
INTERACTIVE, INC., ) Jointly Administered Under
) Chapter 11
Debtors. )
)
- ----------------------------------- ) ORDER CONFIRMING
DEBTORS' FIRST AMENDED
JOINT PLAN OF
REORGANIZATION
Date: April 16, 1998
Time: 3:00 P.M.
Judge: Marilyn Morgan
Confirmation of Debtors' First Amended Joint Plan of Reorganization came
on for hearing on April 16, 1998 at 3:00 P.M. before The Honorable Marilyn
Morgan, United States Bankruptcy Judge. William C. Lewis, Esq., appeared on
behalf of Debtors. Other appearances, if any, were noted in the record. The
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and
Debtors' Joint Disclosure Statement filed by Debtors on March 23, 1998, having
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-1-
<PAGE>
been transmitted to creditors and equity security holders; and
Notice of modification to Debtors' Joint Plan of Reorganization having
been transmitted to creditors and equity security holders on March 20, 1998, an
Amendment to Joint Plan of Reorganization having been filed on March 23, 1998,
and Debtors' First Amended Joint Plan of Reorganization ("Plan") which
incorporated and integrated the provisions of Debtors' Joint Plan of
Reorganization and the Amendment thereto, having been filed by Debtors on
April 15, 1998; and
Debtors and their representatives having solicited acceptances of the
Plan and participated in the offer, issuance and sale under the Plan of
securities of Reorganized LVL in good faith and in compliance with the
applicable provisions of the Bankruptcy Code within the meaning of Section
1125(e) of the Bankruptcy Code; and
Reorganized LVL being a successor to the Debtor within the meaning of
Section 1145 of the Bankruptcy Code; and
In connection with the distribution of Equity Securities of Reorganized
LVL to holders of claims and interests in Debtors, all of the conditions to
availability of the exemption set forth in Section 1145 of the Bankruptcy Code
having been met; and
It having been determined after hearing on notice that the requirements
of confirmation set forth in 11 U.S.C. Section 1129(a) have been satisfied;
IT IS ORDERED that:
1. Debtors' Joint Disclosure Statement is approved.
2. The Plan filed by Debtors on April 15, 1998 is confirmed. A
copy of the confirmed Plan is attached hereto as Exhibit "A."
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-2-
<PAGE>
3. The Court makes the following findings with regard to the
assumption and assignment of the Lease: The assignment of the Lease from Debtors
to Steelcase, Inc., is being made for reasonably equivalent value and is not
being made with actual intent to hinder, delay or defraud creditors or the
estate; therefore, the transfer is not a fraudulent conveyance.
4. Any indemnity claim Steelcase, Inc., may have against Debtors is
hereby granted administrative priority in the within jointly administered cases.
5. Steelcase, Inc., shall have relief from the automatic stay to
obtain possession of the Premises in the event Debtors do not vacate the
Premises as set forth in the Assumption Agreement or any Sublease entered into
by Debtors with Steelcase, Inc., extending the date on which Debtors are to
vacate the Premises.
6. Title to Debtor Commercial Lease, as subsequently amended
(collectively "Commercial Lease"), with RRC Partners, dated as of February 15,
1996 for the premises located at 499 University Avenue (480 Cowper Street),
Palo Alto, California, shall pass to Steelcase, Inc., free and clear of all
liens (specifically excluding the lien of Union Bank and the lien(s) of Santa
Clara County for real property taxes) and such liens shall be extinguished and
shall be of no further force or effect. Such extinguished liens shall include,
but are not limited to, the liens, if any, of Trident III, LLC; The Dot Printer,
Inc.; George Rice & Sons; K/P Corporation; Collectronics, Inc. dba Great Western
Collection; Colorgraphics, Inc. (Abstract of Judgment recorded October 10, 1997
as Instrument No. 13895015 of Official Records, Santa Clara County, CA);
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-3-
<PAGE>
Lyon Financial Services, Inc. (Manifest Group); Miller Freeman, Inc.; Pacific
Video Resources (Abstract of Judgment recorded January 26, 1998 as Instrument
No. 14025328 of Official Records, Santa Clara County, CA); W. Bradley Electric,
Inc. (Abstract of Judgment recorded October 3, 1997 as Instrument No. 13887537
of Official Records, Santa Clara County, CA); and Paula Weinstock.
7. The Order Approving Assumption and Assignment of Unexpired
Commercial Real Property Lease has been executed contemporaneously herewith and
is incorporated by reference herein.
8. The offer and sale under the Plan of Equity Securities of
Reorganized LVL in exchange for claims against Debtors or administrative
expenses in the cases concerning Debtors are exempt from the provisions of
Section 5 of the Securities Act of 1933, as amended, and any state or local law
requiring the registration or qualification for offer or sale of such Equity
Securities or registration or licensing of an issuer of, underwriter of, or
broker or dealer in such Equity Securities, except to the extent that (a) the
availability of such exemption with respect to Equity Securities issued to
insiders of Debtors is limited by the Plan or (b) such Equity Securities are to
be issued to underwriters, as such term is defined in Section 1145(b) of the
Bankruptcy Code.
9. The Committee shall continue to serve in the case until all
agreements, documents, and securities required or permitted in connection with
the Plan are entered into, executed and delivered, and/or issued. Without
limiting the generality of the foregoing, the Committee shall have the right to
(a) investigate and require the Debtors
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-4-
<PAGE>
to file objections to the allowance of any claim or interest pursuant to the
provisions hereof relating to Disputed Claims, (b) approve the form, prior to
the effectiveness thereof, of all agreements, documents, and securities required
or permitted in connection with this Plan (including the agreement for merger or
acquisition with Digital Power Holding Company, the amended Articles of
Incorporation thereof, and the provisions of any stock options or warrants
required or permitted hereunder) for the purpose of assuring that such
agreements, documents, and securities conform to the terms of this Plan, and (c)
employ and cause the Debtors and/or Reorganized LVL to compensate professionals
for services rendered after Confirmation in such amounts as the Committee shall
consider appropriate (subject to the right of the Debtors or Reorganized LVL to
request review by the Bankruptcy Court of the reasonableness of such
compensation). The Committee's right under clause (b) of the preceding sentence
shall include the right to bring a motion before the Bankruptcy Court to compel
modification of such agreements, documents, and/or securities to cause them to
conform to the terms of this Plan.
10. A quarterly fee shall be paid by Debtors to the United States
Trustee, for deposit into the Treasury, for each quarter (including any fraction
thereof) until this case is converted, dismissed, or closed pursuant to a final
decree, as required by 28 U.S.C. Section 1930(a)(6).
11. At the end of the first quarter after entry of this Order, Debtors
shall file a postconfirmation status report, the purpose of which is to explain
the progress made toward substantial consummation of the confirmed Plan. The
report shall include a statement of receipts and
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
disbursements, with the ending cash balance, for the entire quarter. The report
shall also include information sufficiently comprehensive to enable the Court to
determine: (1) whether the Order confirming the Plan has become final; (2)
whether deposits, if any, required by the Plan have been distributed; (3)
whether any property proposed by the Plan to be transferred has been
transferred; (4) whether Debtors under the Plan have assumed the business or the
management of the property dealt with by the Plan; (5) whether payments under
the Plan have commenced; (6) whether accrued fees due to the United States
Trustee under 28 U.S.C. Section 1930(a)(6) have been paid; and (8) whether all
motions, contested matters and adversary proceedings have been finally
resolved. Further reports must be filed at the end of every quarter thereafter
until entry of a final decree, unless otherwise ordered by the Court.
12. A copy of each report shall be served, no later than the day upon
which it is filed with the Court, upon the United States Trustee and such other
persons or entities as may request such report in writing by special notice
filed with the Court.
13. Upon Debtors filing an application for a final decree, Debtors
shall serve the application on the United States Trustee, together with a
proposed final decree. The United States Trustee shall have five (5) days within
which to object or otherwise comment upon the Court's entry of the final decree.
14. Debtor shall pay Dana Commercial Credit ("Dana") $46,636.57 on or
before close of business on May 7, 1998 by delivering said funds to Buchalter,
Nemer, Fields & Younger. Said payment shall represent
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
payment in full of all obligations owed Dana by Debtors and Dana shall transfer
title, free and clear of all liens, to Debtors of the equipment leased from
Dana. In the event Dana does not receive such payment in a timely manner, Dana
may file for relief from the automatic stay to proceed with any action Dana
deems necessary to take possession of the leased equipment. Further, Dana may
file a claim in the Chapter 11 bankruptcy cases.
15. This Court hereby retains jurisdiction as set forth in the Plan.
Dated: April 16, 1998 MARILYN MORGAN
-----------------------------
MARILYN MORGAN
UNITED STATES BANKRUPTCY JUDGE
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
William C. Lewis, Esq., Bar No. 77193 FILED
Sally A. Morello, Esq., Bar No. 122814 APR 15 1998
LAW OFFICES OF WILLIAM C. LEWIS KEENAN G. CASADY, CLERK
510 Waverley Street United State Bankruptcy Court
Palo Alto, CA 94301-2009 San Jose, California
Telephone: (415) 322-3300
Facsimile: (415) 327-9720
Attorneys for Debtors
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re: ) Case Nos:
)
)
LVL COMMUNICATIONS CORPORATION, ) 985-2216 MM
LVL ADVERTISING, INC., and LVL ) 985-2219 MM
INTERACTIVE, INC., ) 985-2222 MM
)
) Jointly Administered Under
Debtors. ) Chapter 11
- --------------------------------- )
DEBTORS' FIRST AMENDED JOINT
PLAN OF REORGANIZATION
Date: April 16, 1998
Time: 3:00 P.M.
Judge: Marilyn Morgan
EXHIBIT "A"
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-i-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DEFINITIONS..............................................................1
Defined Terms ......................................................1
"Administrative Expense Claim"..................................1
"Allowed Claim" or "Allowed Interest" ..........................1
"Allowed Secured Claim" ........................................2
"Ballot"........................................................2
"Bankruptcy Code" ..............................................2
"Bankruptcy Court"..............................................2
"Bankruptcy Rules"..............................................2
"Cash"..........................................................2
"Claimant"......................................................2
"Confirmation"..................................................2
"Confirmation Order"............................................2
"Creditors' Committee"..........................................2
"Debtor" or "Debtors" ..........................................3
"Digital" ......................................................3
"Disputed Claim" or "Disputed Interest" ........................3
"Distribution"..................................................3
"Effective Date"................................................3
"Employee Shareholders" ........................................3
"Equity Security"...............................................4
"Final Order" ..................................................4
"Plan"..........................................................4
"Preference Recoveries" ........................................4
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
"Priority Claim"............................................... 4
"Priority Creditor"............................................ 4
"Pro Rata"..................................................... 4
"Reorganized LVL".............................................. 5
"Tax Claim".................................................... 5
"Unclaimed Property"........................................... 5
"Unimpaired Claims"............................................ 5
"Unpaid Claim Reserve"......................................... 5
"Unsecured Claims"............................................. 5
"Unsecured Claimants".......................................... 5
Undefined Terms................................................. 5
CLASSIFICATION OF CLAIMS AND INTERESTS........................... 5
Nonclassified Claims.......................................... 5
Classified Claims............................................. 6
Specification and Treatment of Claims and Interests........... 6
TREATMENT OF NONCLASSIFIED CLAIMS................................ 7
Administrative Expenses & Priority Claims..................... 7
SPECIFICATION AND TREATMENT OF CLASSIFIED CLAIMS................. 8
Class 1--Pacific Business Funding Corp........................ 8
Class 2--Bridge Investor (Trident)............................ 9
Class 3--Dot Printing......................................... 9
Class 4-A--George Rice & Sons................................ 10
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
<TABLE>
<S> <C>
Class 4-B--Judgment Creditors........................................... 10
Class 5--Unsecured Creditors............................................ 11
Dividend Preferences......................................... 12
Liquidation Preference....................................... 12
Redemption................................................... 13
Conversion Right............................................. 14
Antidilution Provisions...................................... 14
Voting Rights................................................ 15
Board Representation......................................... 15
Information Rights........................................... 15
Exemptions................................................... 16
Contractual Limitations...................................... 16
Class 6-A--LVL Common Shareholders...................................... 18
Class 6-B--LVL Rights Holders........................................... 18
Class 6-C--LVLA and LVLi Equity Holders................................. 19
MEANS FOR IMPLEMENTATION OF THE PLAN
SOURCE OF FUNDS......................................................... 19
Formation and Capitalization of Reorganized Debtor...................... 19
Liquidity and Transferability of Post-Confirmation Equity Interests..... 21
Current and Post-Confirmation Management and Consultants................ 22
Insider Shareholder Notes............................................... 24
Media Obligations....................................................... 25
Treatment of Security Interests......................................... 25
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
<TABLE>
<S> <C>
Employee Benefits..................................................... 25
Steelcase Lease Assumption............................................ 25
Continuing Creditors' Committee....................................... 26
RECOVERY OF AVOIDABLE TRANSFERS............................................... 27
UNPAID CLAIMS RESERVE......................................................... 27
UNCLAIMED PROPERTY............................................................ 28
RETENTION, ENFORCEMENT AND WAIVER OF CLAIMS................................... 29
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES......................... 29
TAXES......................................................................... 30
REVESTING..................................................................... 30
BAR DATE AND NOTICE........................................................... 30
Pre-Petition Claims........................................................ 30
Administrative Claims...................................................... 30
POST-CONFIRMATION BUSINESS TRANSACTIONS....................................... 31
RETENTION OF JURISDICTION..................................................... 31
POST-CONFIRMATION NOTICES..................................................... 32
UTILITIES..................................................................... 33
Exhibit "A"--Fujitsu and S3 Media Creditors
Exhibit "B"--Executory Contracts
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
LVL Communications Corporation ("LVL"), LVL Advertising, Inc. ("LVLA"),
and LVL interactive, Inc. ("LVLi"), (collectively referred to hereinafter as
"Debtor" or "Debtors") propose this First Amended Joint Plan of Reorganization
under Chapter 11 of the Bankruptcy Code.
I. DEFINITIONS
A. Defined Terms
1. "Administrative Expense Claim" means any cost or expense of
administration of the Chapter 11 cases allowed under Section 503(b) of the
Bankruptcy Code, including, without limitation, any actual and necessary
expenses to the extent allowed by the Bankruptcy Court under Section 330 of the
Bankruptcy Code.
2. "Allowed Claim" or "Allowed Interest" means a claim
against, or Equity Security interest in, the Debtors to the extent that
a. If the claim or interest arose or is deemed to have
arisen on or before the Filing Date, (1) proof of the claim or interest either
is timely filed or is deemed filed under Code Section 1111(a) and (2) the
claim or interest either is not the subject of a timely filed objection or is
allowed by a Final Order; or
b. If the claim arose after the Filing Date and is not
deemed to have arisen on or before such date, (1) the claim is of a kind that
can be voluntarily paid from the Debtors' estate without specific Bankruptcy
Court approval and is so paid or (2) the claim has been allowed by a Final
Order; and
c. Such claim is not subject to disallowance pursuant to
Section 502(d) of the Code.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
3. "Allowed Secured Claim" means the Allowed Claim determined
to be secured under provisions of Section 506 of the Bankruptcy Code.
4. "Ballot" means the form distributed to holders of claims
and interests on which is to be stated an acceptance or rejection of Debtors'
Plan.
5. "Bankruptcy Code" means Title 11 of the United States Code
and any amendments applicable to this case.
6. "Bankruptcy Court" means the United States Bankruptcy Court
for the Northern District of California or, in the event such court ceases to
exercise jurisdiction over this Chapter 11 case, such court or adjunct thereof
which thereafter exercises jurisdiction over this Chapter 11 case.
7. "Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure, as amended, as applicable to cases pending before the Bankruptcy
Court.
8. "Cash" means cash and cash equivalents including, but not
limited to, checks and other similar forms of payment or exchange.
9. "Claimant" means a holder of an Allowed Claim.
10. "Confirmation" means entry of the Confirmation Order.
11. "Confirmation Order" means the entered order of the
Bankruptcy Court confirming the Debtors' Plan.
12. "Creditors' Committee" means the committee of unsecured
creditors formed at a general meeting of creditors held on June 24, 1997 and
any committee appointed under Section 1102 of the Code.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
13. "Debtor" or "Debtors" means LVL Communications Corporation,
a California corporation, LVL Advertising, Inc., a California corporation, and
LVL interactive, Inc., a California corporation, collectively.
14. "Digital" means Digital Power Holding Company, a Nevada
corporation in good standing, subject to the reporting requirements under the
Securities Exchange Act of 1934, with 1,000,000 shares of common stock
outstanding.
15. "Disputed Claim" or "Disputed Interest" means a claim
against, or equity security interest in, a Debtor (a) which has been included
in the Debtors' schedules as disputed, contingent, or unliquidated, unless
proof of such claim has been filed which has not been objected to, or (b) as to
which the Debtor or any other party in interest has interposed an objection in
accordance with the Bankruptcy Code and the Bankruptcy Rules, which objection
has not been withdrawn or determined by a Final Order.
16. "Distribution" means the Cash or Equity Security to be
distributed under the Plan to holders of Allowed Claims, Allowed Interests or
other parties in interest under the terms of the Plan.
17. "Effective Date" means the date on which acquisition of
Debtors by Digital or merger of Debtors into Digital takes place, which shall
occur as soon as practicable after the order confirming the Plan becomes a
Final Order, but in no event later than 90 days after the Final Order.
18. "Employee Shareholders" means Steve Sousa, Ron Ewing and
Ed Dilworth, collectively.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
19. "Equity Security" means any equity interest in Debtors or
in Reorganized LVL including, but not limited to, preferred and common stock,
options and warrants.
20. "Final Order" means an order of the Bankruptcy Court as to
which (a) any appeal that has been taken, with respect to which there has been
a stay pending appeal, has been finally determined or dismissed, or (b) the
time for appeal has expired and a notice of appeal has not been filed timely,
or (c) a notice of appeal has been timely filed for which there is no stay
issued pending appeal.
21. "Plan" means this First Amended Joint Plan of
Reorganization together with any amendments or modifications thereto which may
be filed by Debtors.
22. "Preference Recoveries" means proceeds, if any, from
pending or future preference actions commenced by Debtors.
23. "Priority Claim" means any claim, other than an
Administrative Expense Claim or a Tax Claim, to the extent entitled to priority
in payment under Section 507(a) of the Bankruptcy Code.
24. "Priority Creditor" means any creditor that holds a
Priority Claim.
25. "Pro Rata" means proportionately so that the ratio of the
consideration distributed on account of an Allowed Claim or Allowed Interest in
a class to the consideration distributed on account of all Allowed Claims or
Allowed Interests in the class is the same as the ratio of such Allowed Claim
or Allowed Interest to all Allowed Claims or Allowed Interests in the class,
subject to the provisions set forth in the Plan regarding fractional
distributions.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
26. "Reorganized LVL" means Digital subsequent to Digital's
merger with LVL or LVL becoming a wholly owned subsidiary of Digital.
27. "Tax Claim" means any claim that is entitled to priority in
payment under Section 507(a)(8) of the Bankruptcy Code.
28. "Unclaimed Property" means any distributions which remain
unclaimed ninety (90) days following each distribution under the Plan.
29. "Unimpaired Claims" means any claims which are not impaired
under Debtors' Plan in accordance with Section 1124 of the Bankruptcy Code.
30. "Unpaid Claim Reserve" means an account which will contain
funds and/or Reorganized LVL Equity Securities designated for Claimants who
hold Disputed Claims. The funds held in the Unpaid Claim Reserve will be
maintained in an interest bearing account.
31. "Unsecured Claims" means all Allowed Claims other than
Allowed Secured Claims, Administrative Expense Claims, Priority Claims, Tax
Claims, and claims of Classes 1, 2, 3, 4-A, 4-B, 6-A, 6-B and 6-C.
32. "Unsecured Claimants" means any Claimant that is the holder
of an Unsecured Claim.
B. Undefined Terms: A term used, but not defined in Debtors' Plan,
but defined in the Bankruptcy Code has the meaning given to that term in the
Bankruptcy Code.
II. CLASSIFICATION OF CLAIMS AND INTERESTS
A. Nonclassified Claims: Priority claims pursuant to 11 U.S.C.
Section 507(a) are not classified under this Plan.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
B. Classified Claims: All Allowed Claims (except Allowed Claims
treated under Article III of this Plan) and Allowed Interests are placed in the
following Classes:
<TABLE>
<S> <C>
Class 1: Pacific Business Funding Corporation secured
claim and warrants;
Class 2: Trident III, LLC, secured claim;
Class 3: Dot Printer claim;
Class 4-A: George Rice & Sons claim;
Class 4-B: Miscellaneous Claimants with judicial liens;
Class 5: Unsecured Claims;
Class 6-A: LVL common shareholders;
Class 6-B: Holders of rights to acquire common stock of LVL;
and
Class 6-C: LVLA and LVLi Equity Holders.
</TABLE>
C. Specification and Treatment of Claims and Interests: The treatment
of the claims and interests described below applies only to Allowed Claims and
Allowed Interests. Distributions to holders of claims or interests that are not
Allowed Claims or Allowed Interests as of the Effective Date will be made, in
accordance with the Plan provisions for such classes of claims and interests,
after each such claim or interest becomes an Allowed Claim or Allowed Interest.
Debtors may file an objection to the allowance of any claim or interest no
later than 60 days after the Effective Date (the "First Claim Objection Date").
Within the 30 days following receipt of a report from Debtors identifying all
claims and indicating claims which Debtors have objected to, the Creditors'
Committee may identify to Reorganized LVL additional objections to claims which
the Creditors' Committee believes should be filed ("Creditor Objection Notice")
and Debtors shall file such objections within 60 days following receipt of the
Creditor Objection Notice if timely received.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
III. TREATMENT OF NONCLASSIFIED CLAIMS
Administrative Expenses & Priority Claims
1. Except as provided in paragraphs 2 and 3, below, the holders of
Allowed Claims entitled to priority under Section 507(a) of the Bankruptcy
Code, except professional fees requiring court approval under Section 330 of
the Bankruptcy Code, shall be paid on the Effective Date or as soon thereafter
as such a claim becomes an Allowed Claim, except to the extent a holder of such
claim has agreed to other treatment. Professional fees shall be paid upon court
approval of a duly noticed fee application. All such Administrative Expense
Claims and Priority Claims shall retain their priority status until paid in
full. Such priority status shall continue in the event such claims are not paid
under this Plan, including, but not limited to, conversion of this case to
Chapter 7. Post Confirmation fees to professionals shall be paid in full,
monthly, unless otherwise agreed with such professionals. The Court shall
retain jurisdiction to address Debtors' objections to any fees.
2. The holders of Allowed Claims entitled to priority pursuant to 11
U.S.C. Section 507(a)(8) may be paid monthly by Debtors over a period of up to
six years or sooner at the discretion of Debtors, with interest at the rate
allowed by law.
3. Administrative Expense Claims for goods and services incurred in
the ordinary course of Debtors' business will be paid in accordance with
Debtors' agreement with the holders thereof.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
IV. SPECIFICATION AND TREATMENT OF CLASSIFIED CLAIMS
Holders of Allowed Claims shall receive the distributions set forth in
this Article on account of, and in complete satisfaction of, all such Allowed
Claims.
All stock issued pursuant to this Plan shall be issued on the Effective
Date or as soon thereafter as is practicable. No fractional shares will be
issued, but will instead be rounded to the next nearest whole number.
1. Class 1 is impaired and consists of the Allowed Secured Claim
of Pacific Business Funding Corporation ("PBF"). PBF's Allowed Secured Claim is
comprised of the indebtedness and obligations of Debtors to PBF under certain
factoring agreements in effect at the commencement of the Chapter 11 cases,
which provide for a receivables line of credit (the "Factoring Agreements") and
related warrants for acquisition of Debtors' Equity Securities. The obligations
and indebtedness of Debtors under the Factoring Agreements are secured by a
security interest in all of the Debtors' personal property assets, described in
the Factoring Agreements as all "Collateral." This Plan shall not alter the
legal, equitable, or contractual rights of PBF except that all warrants held by
PBF to purchase shares of Debtors' Equity Securities shall be canceled on the
Effective Date and, on the Effective Date, PBF shall receive warrants to
purchase 50,000 shares of Reorganized LVL common stock at $0.50 per share.
PBF shall continue to be paid under and pursuant to the terms of
the Factoring Agreements and shall retain its liens upon and security interest
in all Collateral until it receives full and final payment of all
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
"Obligations" under and as defined in the Factoring Agreements. In the event
PBF continues to provide financing to Reorganized LVL, PBF may enter into a new
factoring agreement with Reorganized LVL and may incorporate in such new
factoring agreement all of the Obligations of Debtors to PBF under the
Factoring Agreements. All of the Debtors' obligations under any new factoring
agreement, including the Obligations under the Factoring Agreements, shall be
secured by all of the personal property assets of Reorganized LVL.
2. Class 2 Bridge Investor is Trident III, LLC ("Trident").
Trident loaned Debtors $600,000 ("Bridge Funding'), secured by Debtors'
leasehold interest in 499 University Avenue (480'Cowper Street), Palo Alto,
California ("Leasehold"). When the Order confirming the Plan becomes a Final
Order, Trident's security interest in the Leasehold shall terminate. Trident
shall be issued 600,000 shares of redeemable common stock in Reorganized LVL,
redeemable at $1.00 per share. These shares shall be redeemable only in the
event that there is a post-confirmation financing for a minimum of $3 million.
In addition, Trident shall be issued 440,000 shares of non-redeemable common
stock in Reorganized LVL.
3. Class 3 is impaired and consists of the Allowed Secured
Claim, if any, of The Dot Printer, Inc., a California corporation ("Dot"). To
the extent the Bankruptcy Court determines that Dot is secured pursuant to 11
U.S.C. Section 506, such amount shall be paid in full in equal quarterly
payments, including principal and interest, over a period of five (5) years
from the Effective Date, including interest at the rate of ten percent (10%)
per annum or such other interest rate as may be
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
determined by the Bankruptcy Court if Dot objects to such rate. Any unsecured
portion of Dot's claim will be treated as a non-priority, unsecured claim in
Class 5, below. To the extent secured by Section 506 of the Bankruptcy Code and
not otherwise avoidable, Dot will retain its lien (other than a lien on the
leasehold being transferred to Steelcase under the Plan) with the same
validity, priority and effect it held immediately prior to the filing date of
the Chapter 11 cases.
4. Class 4-A is impaired and consists of the Allowed Secured Claim,
if any, of George Rice & Sons, a division of World Color Press, Inc., a
Delaware corporation ("Rice"). To the extent the Bankruptcy Court determines
that Rice is secured and/or is not avoidable pursuant to 11 U.S.C. Sections
506 and 547 or other provisions of the Bankruptcy Code, such amount
shall be paid in full in equal quarterly payments, including principal and
interest, over a period of five (5) years from the Effective Date, including
interest at the rate of ten percent (10%) per annum or such other interest rate
as may be determined by the Bankruptcy Court if Rice objects to such rate. Any
unsecured portion of Rice's claim will be treated as a non-priority, unsecured
claim in Class 5, below. To the extent secured by Section 506 of the Bankruptcy
Code and not otherwise avoidable, Rice will retain its lien (other than a lien
on the leasehold being transferred to Steelcase under the Plan) with the same
validity, priority and effect it held immediately prior to the filing date of
the Chapter 11 cases.
Class 4-B is impaired and consists of the Allowed Secured Claims,
if any, of any other Creditors who obtain judgment liens or any other type of
judicial liens (including but not limited to attachments,
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
temporary protective orders, liens pursuant to an Order of Examination, or
personal or real property judgment liens) against Debtors' assets. To the extent
the Bankruptcy Court determines that any Class 4-B creditor is secured and/or is
not avoidable pursuant to 11 U.S.C. Sections 506 and/or 547 or other provisions
of the Bankruptcy Code, such amount shall be paid in full in equal quarterly
payments, including principal and interest, over a period of five (5) years from
the Effective Date, including interest at the rate of ten percent (10%) per
annum or such other interest rate as may be determined by the Bankruptcy Court
if any Class 4-B creditor objects to such rate. Any unsecured portion of any
Class 4-B creditor's claim will be treated as a non-priority, unsecured claim in
Class 5, below. To the extent secured by Section 506 of the Bankruptcy Code and
not otherwise avoidable, any Class 4-B creditor will retain its lien (other than
a lien on the leasehold being transferred to Steelcase under the Plan) with the
same validity, priority and effect it held immediately prior to the filing date
of the Chapter 11 cases.
5. Class 5 is impaired and consists of all non-priority Allowed
Unsecured Claims. Each Claimant with an Allowed Claim in Class 5 shall receive a
pro rata portion of 600,000 shares of Series A Convertible Preferred Stock
("Preferred Stock") in Reorganized LVL, unless such Claimant elects to receive
Cash in lieu of such portion pursuant to the next paragraph.
Class 5 Claimants holding claims of $5,000 or less may elect to receive
10% of their Allowed Claims, in Cash, on the Effective Date, in lieu of
receiving Preferred Stock in Reorganized LVL. In addition, Class 5 Claimants
holding Allowed Claims in excess of $5,000 may elect to
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
reduce their Allowed Claims to $5,000 and receive $500 on the Effective Date
(10% of the reduced Allowed Claim), in lieu of receiving Preferred Stock in
Reorganized LVL. The election by any Class 5 Claimants to receive cash on the
Effective Date rather than Preferred Stock in Reorganized LVL pursuant to this
provision is hereinafter referred to as the "Cash Option." The pool of 600,000
preferred shares of Reorganized LVL will be reduced by the percentage in dollar
amount of Allowed Claims electing the Cash Option.
The Preferred Stock shall have the rights, privileges and preferences as
follows:
a. Dividend Preferences. The holders of the Preferred
Stock shall, upon the vote of the majority of the Board of Directors, be
entitled to receive, out of any funds legally available therefor, cumulative
dividends at a rate of $0.05 per share, per year, prior and in preference to
any payment of any dividend on the common stock. Such dividends shall be paid
when, as and if declared by the Board of Directors. The dividend rights and
preferences of the Preferred Stock shall be senior to those of the common
stock. After the dividend preferences of the Preferred Stock due in a given
year have been paid in full, all remaining dividends in such year, if any,
shall be paid equally on the common stock and the Preferred Stock.
b. Liquidation Preference. In the event of any
liquidation, dissolution or winding up of Reorganized LVL, or the sale, merger
or combination of Reorganized LVL, a public offering in excess of $25 million,
a merger or consolidation of Reorganized LVL in which its shareholders do not
retain a majority of the voting power in the
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE>
surviving corporation, or a sale of all or substantially all of Reorganized
LVL's assets (singularly or collectively referred to as a "Liquidation
Preference Event") or a Liquidating Preference Event of LVL Subsidiary (as
hereafter defined) if LVL is not merged into Digital, the holders of the
Preferred Stock will be entitled to receive an amount equal to $6.67 per share
for the Preferred Stock, plus an amount equal to all declared but unpaid
dividends thereon (the "Preference Amount"). After the Preference Amount on all
outstanding shares of Preferred Stock has been paid, any remaining funds and
assets of Reorganized LVL legally available for distribution to shareholders
shall be distributed pro rata solely among the holders of the common stock. If
Reorganized LVL has insufficient assets to permit payment of the Preference
Amount in full to all holders of the Preferred Stock, then the assets of
Reorganized LVL shall be distributed ratably to the holders of the Preferred
Stock in proportion to the Preference Amount each such holder would otherwise
be entitled to receive. Reorganized LVL shall give Class 5 Claimants holding
Preferred Stock thirty (30) days advance written notice prior to a Liquidation
Preference Event and such persons shall have the right to convert to common
stock as described below during such thirty (30) day period.
c. Redemption. The Preferred Stock shall be redeemable
in part or in full at the option of Reorganized LVL on thirty (30) days advance
written notice to the holders of the Preferred Stock for a redemption price of
$6.67 per share. Upon receipt of notice of Reorganized LVL's intention to
redeem the Preferred Stock, each holder of the Preferred Stock shall have the
option to convert to common stock
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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as described below. Any partial redemption shall be made on a pro rata basis.
d. Conversion Right. Each holder of the Preferred Stock
shall have the right to convert the Preferred Stock into shares of common stock
in part or in full at any time, including within 30 days after notice by
Reorganized LVL of its intention to redeem the Preferred Stock or of a
Liquidation Preference Event. The initial conversion rate for the Preferred
Stock shall be one-for-one. All rights incident to a share of Preferred Stock
(including but not limited to rights to any declared but unpaid dividends) will
terminate automatically upon any conversion of such share into common stock.
e. Antidilution Provisions. The number of shares of
common stock issuable upon conversion of each share of Preferred Stock shall be
subject to adjustment from time to time upon the occurrence of certain events
described below and the number of shares of common stock issuable for each
share of the Preferred Stock at any given time shall be subject to adjustment
as follows: In the event Reorganized LVL shall (i) pay a dividend or make a
distribution on its shares of common stock in shares of common stock, (ii)
subdivide or reclassify its outstanding common stock in shares of common stock
into a greater number of shares, or (iii) combine or reclassify its outstanding
common stock into a smaller number of shares, the conversion ratio in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of the Preferred Stock converted
after such date shall be entitled to receive the aggregate
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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number and kind of shares which, if the Preferred Stock had been converted by
such holder immediately prior to such date, the holder would have owned upon
such conversion and been entitled to receive upon such dividend, subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any such event listed above shall occur. The conversion ratio shall
be adjusted upon issuance of additional common stock or rights to acquire common
stock at a price of less than $1.00 per share, except those rights
specifically required or permitted in connection with this Plan.
f. Voting Rights. The holders of the Preferred Stock shall have
the right to vote as a class on (i) the merger, sale, liquidation or
dissolution of Reorganized LVL and/or LVL Subsidiary, (ii) a sale of all or
substantially all of Reorganized LVL's or LVL Subsidiary's assets, (iii) any
increase in the number of authorized shares of any class or series of
Reorganized LVL Equity Securities, (iv) creation of any new class or series of
Equity Securities in Reorganized LVL and/or LVL Subsidiary, (v) any increase in
the number of members of the Board of Directors of Reorganized LVL and LVL
Subsidiary, and (vi) election of one member of the Board of Directors of
Reorganized LVL and LVL Subsidiary.
g. Board Representation. The rights of the holders of the
Preferred Stock to elect a member of the Board of Directors shall terminate once
(1) more than 50% of the Preferred Stock has converted to common stock, (2) a
Liquidation Preference Event has occurred, or (3) more than 50% of the Preferred
Stock has been redeemed.
h. Information Rights. Reorganized LVL will furnish holders of
the Preferred Stock with annual unaudited consolidated
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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financial statements together with such notes and commentary by management as is
usual and customary, as well as copies of all form 10-Q's and 10-K's filed by
Reorganized LVL.
i. EXEMPTIONS. Stock and warrants being issued to Classes 1,
2, 5 and 6-A in exchange for a claim against or interest in or a claim for an
administrative expense in the case (and all securities issued upon conversion or
exercise of such stock and warrants) are exempt pursuant to the provisions of
ss.1145(a) of the Bankruptcy Code. However, this provision shall nor be
construed as limiting any restrictions imposed on holders of control securities
by Rule 144 promulgated by the Securities and Exchange Commission or contractual
limitations imposed by this Plan.
j. CONTRACTUAL LIMITATIONS. Stock and warrants issued to
Classes 1, 2, 5 and 6-A and the shares issued to Mackenzie Shea, Inc. ("MSI")
and certain others will be subjected to the lock-up provisions described below
("Lock-up Provisions"). Lock-Up Provisions are contractual provisions on the
ability to transfer shares evidenced by a written agreement that shares will not
be sold, hypothecated, pledged, encumbered, or otherwise transferred for a
particular period of time and further evidenced by a legend on the stock
certificate. Lock-Up Provisions for shares issued to Classes 1, 2, 5, 6-A and
MSI and certain others as follows:
(1) Class 2 shares are subject to a twelve (12) month
Lock-Up Provision imposed as of the close of merger into Digital or acquisition
of LVL, and shall be released from such Lock-up Provision as follows: (a)
one-third after six (6) months; (b) one-third after nine
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(9) months; and (c) one-third after twelve (12) months ("Initial Class 2
Lock-Up"). Reorganized LVL may, at its discretion, release shares owned by Class
2 earlier than the release schedule set forth herein.
(2) Shares issued to (i) Classes 1, 5 and 6-A Claimants
and/or Equity Security holders and (ii) MSI and any other affiliates of Debtors,
as well as shares issued on exercise of options or warrants issued in connection
with this Plan to any affiliate of Debtors and to underwriters in connection
with the Post-Confirmation Investment shall not be sold by their holders for
twelve (12) months after the close of merger into Digital or Digital's
acquisition of LVL ("Initial General Lock-Up"). Such shares may be further
subject to subsequent Lock-Up Provisions imposed by underwriters in conjunction
with further financing representing a minimum of $1 million in the event such
financing occurs within the initial twelve (12) month restriction period, but,
with respect to Class 5, shall apply only to Class 5 holders who receive one
hundred (100) or more shares of stock in Reorganized LVL (the "Additional
Lock-Up"). The Additional Lock-Up, if it occurs, shall apply equally to all
parties receiving stock hereunder except Class 2, Class 5 creditors who receive
less than 100 shares, and the pre-existing shares of Digital. Reorganized LVL
shall have the right to release shares subject to the foregoing Lock-Up
Provisions as to any number of shares of Equity Securities provided that any
release of less than all Equity Securities subject to such Lock-Up Provisions
shall be allocated pro rata among all holders of such Equity Securities.
(3) Notwithstanding the foregoing, the Initial Class 2
Lock-Up, the Initial General Lock-Up and the Additional Lock-Up shall
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not prevent the sale, transfer or encumbrance of such securities in transactions
outside the public market if the transferor receives from the transferee written
acknowledgment that the securities will continue to be subject to the foregoing
restrictions in the hands of the transferees.
6. CLASS 6 Equity Security Interests:
a. CLASS 6-A is impaired and consists of the holders of common
stock of LVL which is not canceled on the Effective Date pursuant to "Insider
Shareholder Notes," paragraph V.D., below. Class 6-A equity holders whose stock
is not canceled on the Effective Date (Calbert Lai, Steven Venuti and Don
Sanders) shall receive pro rata portions of 600,000 shares of common stock in
Reorganized LVL in exchange for their Equity Security interests in LVL.
In addition to restrictions set forth in subparagraph 5(j)(2), above,
shares issued to Class 6-A Equity Security Holders may not be sold, transferred
or otherwise disposed of until the earliest of (1) thirty-six months (36) months
after the Effective Date, (2) a Liquidation Preference Event, or (3) the closing
bid price reported on the NASDAQ market system for the common stock of
Reorganized LVL has exceeded the conversion price of the Preferred Stock for ten
consecutive trading days. An encumbrance of such shares shall not be deemed to
be a sale or transfer.
b. CLASS 6-B is impaired and consists of the holders of all
rights to acquire common stock of Debtors, excluding PBF's warrants specifically
addressed in Class 1, above. All vested and unvested rights of Class 6-B shall
be canceled upon Confirmation.
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c. Class 6-C is impaired and consists of LVL, the holder of
Equity Securities in LVLA and LVLi. LVL holds 100% of the Equity Securities of
LVLA and LVLi. All Equity Securities held by LVL in LVLA and LVLi shall be
canceled on the Effective Date and in conjunction with the merger of LVLA and
LVLi into LVL.
V. MEANS FOR IMPLEMENTATION OF THE PLAN: SOURCE OF FUNDS
A. Formation and Capitalization of Reorganized Debtor: Digital will
merge with LVL or acquire Debtors' shares and will issue or reserve up to
4,900,000 shares of newly issued common stock and common stock equivalents upon
court Confirmation of Debtor's Plan.
Upon the Effective Date, (a) LVLA and LVLi shall be merged into LVL, and
(b) LVL shall be merged into Digital or become its wholly owned subsidiary ("LVL
Subsidiary"). Concurrently, Digital shall file amended Articles of Incorporation
which (a) rename the corporation "LVL Communications, Inc.," (b) authorize
600,000 shares of Series A Preferred Stock with the rights, privileges and
preferences set forth in IV.5., above, (c) authorize a number of shares of
common stock which is at least the number of shares required or permitted to be
issued in connection with this Plan, and (d) prohibit the issuance of non-voting
Equity Securities to the extent required by Section 1123 of the Bankruptcy Code.
LVL will pay $150,000 to the Digital shareholders as partial consideration for
the transaction.
Concurrently, Reorganized LVL shall issue (a) the warrants to be
distributed to PBF, (b) the common stock to be issued to Trident, (c) the
Preferred Stock, and (d) common stock to the holders of Allowed Claims in Class
6-A.
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In addition:
(a) Reorganized LVL may establish a stock option plan under which
options may be granted to acquire not more than 1,400,000 shares of common stock
of Reorganized LVL, provided that (i) such options may only be granted to
existing and future employees and consultants of Reorganized LVL, (ii) the
exercise price under such options shall be not less than the fair market value
of such shares on the date of grant, and (iii) such options shall vest ratably
over a period of not less than three years from the date of grant. The
individual employees to receive such options and the numbers of shares to be
covered by each option shall be determined by the Compensation Committee of the
Board of Directors. Stock options to be granted to Steve Venuti and Cal Lai
shall vest as follows: (1) one-half of the options shall vest ratably over a
period of not less than three years from the date of grant, and (2) the
remaining one-half of the options shall not vest until Reorganized LVL has had
sales of at least $12 million for any 12 consecutive month period and
Reorganized LVL is profitable on a quarterly basis throughout that same 12 month
period.
(b) Reorganized LVL may also issue 1,000,000 or more shares of
common stock at $1.25 or more per share to accredited investors for
post-Confirmation financing ("Post-Confirmation Investment"). In addition,
Trident and/or its affiliate will receive warrants in conjunction with the
Post-Confirmation Investment. Further, Reorganized LVL may issue 1,000,000
shares of common stock to MSI. Any shares issued to MSI shall be deemed control
securities whose resale is limited by Rule 144.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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(c) Reorganized LVL may issue warrants to acquire its common
stock at an exercise price of not less than $0.50 per share to the following:
(i) 25,000 shares to Wayne Mascia and Associates, (ii) 25,000 shares to
underwriters and others in connection with the issuance of notes to Trident, and
(iii) 250,000 shares to underwriters and others in connection with obtaining
Post-Confirmation Investment, provided that none of such warrants may be issued
to MSI or its affiliates.
No other rights to acquire Equity Securities may be issued by Reorganized
LVL in connection with this Plan, nor may any shares of LVL Subsidiary or rights
to acquire such shares be issued. However, this restriction shall not prohibit
Reorganized LVL from issuing additional Equity Securities after consummation of
these transactions contemplated by the Plan as long as such issuances do not
violate the terms of this Plan.
Confirmation of the Plan is conditioned upon Trident having loaned Debtors
a minimum of $400,000 prior to filing of their Chapter 11 cases.
B. Liquidity and Transferability of Post-Confirmation Equity
Interests: Not later than 90 days after the Effective Date, Reorganized LVL
shall file an application for listing of its common stock on NASDAQ and shall
diligently pursue such application.
No representations are made to any party concerning the tax attributes and
effects of issuance of shares, options and warrants pursuant to the Plan. You
are advised to consult your own tax adviser.
THE STOCK OF REORGANIZED LVL IS STOCK WHICH WILL NOT HAVE A MARKET
INITIALLY AND WHICH DEBTORS ANTICIPATE WILL BECOME ACTIVELY TRADED. REORGANIZED
LVL WILL HAVE NO
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CONTROL OVER MARKET REACTIONS AND MAKES NO REPRESENTATION THAT IT WILL SUCCEED
IN CREATING AN ACTIVE TRADING MARKET OR ACHIEVING ANY SPECIFIC VALUE.
C. Current and Post-Confirmation Management and Consultants: Cal Lai
will continue to act as Chief Executive Officer of Reorganized LVL with a base
annual salary of $150,000, plus bonuses based on gross profit of Reorganized LVL
not to exceed fifty percent (50%) of base annual salary. A Chief Operating
Officer will be hired for Reorganized LVL with a base annual salary of
approximately $150,000.
The Board of Directors of Reorganized LVL shall consist initially of five
(5) directors: (i) one director elected by the holders of the Preferred Stock as
a class; (ii) Calbert Lai, (iii) the new Chief Operating Officer of Reorganized
LVL; (iv) one nominee of Trident who will be replaced by a nominee of the
parties making the Post-Confirmation Investment ("Investment Group"), if any;
and (v) Tom Schultz, or a nominee of the non-insider common shareholders. If LVL
is not merged into Digital but, instead, remains as the LVL Subsidiary, the
Board of Directors of LVL Subsidiary shall have the same size and composition as
the Board of Directors of Reorganized LVL and such Board shall be subject to the
same rights and responsibilities as to the LVL Subsidiary as does the Board of
Reorganized LVL.
The Boards of Directors of LVL and LVL Subsidiary shall have two
committees, the Compensation Committee and the Audit Committee which shall
continue in force as long as 50% of the Preferred Stock remains outstanding. The
Compensation Committee and the Audit Committee shall each consist of three (3)
members as follows:
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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Person elected by holders of Preferred Stock as a class Tom Schultz,
or a nominee of the non-insider shareholders Nominee of Trident or
Investment Group
MSI has provided services to Debtors pre-Confirmation, and will continue
to provide services to Reorganized LVL post-Confirmation. For its services
rendered to Debtors, and subsequently Reorganized LVL, MSI will receive:
1. $20,000 non-refundable retainer paid $10,000 upon
engagement and $10,000 upon close of escrow on the Bridge Funding;
2. 750,000 shares of Reorganized LVL common stock on the
Effective Date (50% to MSI and 50% to Tom Schultz);
3. 250,000 shares of Reorganized LVL common stock (50% to MSI
and 50% to Tom Schultz) shall be issued on the Effective Date, held in escrow,
and released to MSI and Tom Schultz only upon the occurrence of one of the
following events:
(a) The net worth of Reorganized LVL increases by
$1,000,000 (excluding the effect of the lease assignment to Steelcase, Inc., and
any other non-financing transactions outside the ordinary course of business)
from immediately after the Effective Date to the end of the eighth month which
ends after the Effective Date; or
(b) A total of $1,000,000 in proceeds is received by
Debtors and/or Reorganized LVL from the Bridge Funding and any
Post-Confirmation Investment received within eight months after the Effective
Date.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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In the event that neither event (a) nor event (b) occurs within the
preceding time period, Reorganized LVL shall repurchase said 250,000 shares for
the total amount of $1.
4. A monthly fee of $10,000 payable for one year, beginning
upon engagement, to be paid as cash becomes available from operations or from
the proceeds of Debtors' financing efforts;
5. Separately budgeted per diem or project fees for specific
activities or projects undertaken from time to time by MSI at the request of
Debtors; and
6. Reimbursement of legal, travel, and other out-of-pocket
expenses pre-approved by Debtors.
Resale of shares issued to MSI will be restricted by Rule 144 and the same
Lock-Up Provisions as Classes 1, 5 and 6-A.
Tom Schultz has acted as Chief Operating Officer for LVL on a contract
basis. He will be compensated by Debtors and/or Reorganized LVL for his services
to Debtors and/or Reorganized LVL on an hourly basis until the hiring of a full
time Chief Operating Officer. After such time, his sole Cash compensation shall
be one-half of the MSI $10,000 monthly fee and he shall cease to act as Chief
Operating Officer. Mr. Schultz will serve on Reorganized LVL's Board of
Directors, Compensation Committee and Audit Committee.
D. Insider Shareholder Notes: On the Effective Date (a) all note
obligations created in conjunction with the purchase of Equity Securities of
Debtors held by Employee Shareholders shall be canceled, (b) such cancellation
shall discharge any and all claims which the Employee Shareholders may have or
have had against Debtors for any reason
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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based on any act or omission prior to the commencement of the Chapter 11 cases,
and (c) all Equity Securities in Debtors owned by Employee Shareholders shall
also be canceled (the "Canceled Employee Shares"). These provisions do not
affect Don Sanders.
E. Media Obligations: A compromise among the Debtors, the media
creditors listed on Exhibit "A" ("Media Creditors"), S3 and Fujitsu is being
negotiated pursuant to which, at confirmation of the Plan S3 would pay up to
$125,000 to LVL and Fujitsu would pay up to $100,000 to LVL in full satisfaction
of their respective obligations to LVL, and the media creditors listed on
Exhibit "A" who consent to this settlement will be deemed to have released S3
and Fujitsu from all claims arising from advertising placed on their behalf by
LVL. Such payments by S3 and/or Fujitsu will be reduced, pro rata, for any Media
Creditor who does not consent to the compromise or eliminated entirely if S3 or
Fujitsu rejects the settlement because it has not been consented to by all Media
Creditors associated with its obligation.
F. Treatment of Security Interests: All security interests and liens
including, but not limited to judicial liens and attachments, are extinguished
at Confirmation except security interests existing in favor of PBF and any
security interests determined to be held by Classes 3, 4-A and 4-B Claimants
which are preserved under the express terms of this Plan.
G. Employee Benefits: Accrued vacation pay and other employee
benefits for employees who are employed by Debtors as of the date of
commencement of the Chapter 11 cases shall continue to be paid in the ordinary
course of business by Reorganized LVL.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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H. Steelcase Lease Assumption: Debtor shall assume and assign the
lease with RRC Partners for the premises located at 499 University Avenue (480
Cowper Street), Palo Alto, California to Steelcase, Inc., pursuant to the
agreement Debtor entered into with Steelcase, Inc., regarding such assignment.
On the Effective Date the following contractual requirements shall be performed:
(1) to the extent the automatic stay remains in effect after the Effective Date,
such automatic stay shall be vacated to permit Steelcase, Inc., to obtain
possession of the premises and to perform under the terms of the Steelcase
Agreement; (2) Steelcase, Inc., shall be granted possession of the subject
premises as of May 1, 1998 free and clear of all liens and encumbrances; and (3)
any indemnity claim that Steelcase, Inc., establishes as valid against LVL shall
be granted administrative priority in the bankruptcy case. Confirmation of this
Plan shall be deemed to be approval of such assumption and assignment by the
Bankruptcy Court and constitute a finding that the Steelcase, Inc., transaction
is not a fraudulent conveyance.
I. Continuing Creditors' Committee Notwithstanding Confirmation, the
Committee shall continue to serve in the case until all agreements, documents,
and securities required or permitted in connection with the Plan are entered
into, executed and delivered, and/or issued. Without limiting the generality of
the foregoing, the Committee shall have the right to (a) investigate and require
the Debtor to file objections to the allowance of any claim or interest pursuant
to the provisions hereof relating to Disputed Claims, (b) approve the form,
prior to the effectiveness thereof, of all agreements, documents, and
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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securities required or permitted in connection with this Plan (including the
agreement for merger or acquisition with Digital Power Holding Company, the
amended Articles of Incorporation thereof, and the provisions of any stock
options or warrants required or permitted hereunder) for the purpose of assuring
that such agreements, documents, and securities conform to the terms of this
Plan, and (c) employ and cause the Debtors and/or Reorganized LVL to compensate
professionals for services rendered after Confirmation in such amounts as the
Committee shall consider appropriate (subject to the right of the Debtors or
Reorganized LVL to request review by the Bankruptcy Court of the reasonableness
of such compensation). The Committee's right under clause (b) of the preceding
sentence shall include the right to bring a motion before the Bankruptcy Court
to compel modification of such agreements, documents, and/or securities to cause
them to conform to the terms of this Plan.
VI. RECOVERY OF AVOIDABLE TRANSFERS
The Debtors may commence any adversary proceeding to recover transfers
avoidable under the Bankruptcy Code within the time specified in the Bankruptcy
Code.
VII. UNPAID CLAIMS RESERVE
1. Except to the extent the Bankruptcy Court shall determine that a
sufficient reserve for Disputed Claims is less than the full amount asserted by
the holder thereof, in determining the amount of distributions due to the
holders of Allowed Claims and to be reserved for Disputed Claims, the
appropriate Pro Rata calculations required by
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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section IV of this Plan shall be made as if all Disputed Claims were Allowed
Claims.
2. On the Effective Date, all distributions that would be delivered
to holders of Disputed Claims if they were Allowed Claims shall be deposited by
the Debtors in the Unpaid Claims Reserve.
3. All Cash held in the Unpaid Claims Reserve shall be invested in
such investments as are permitted under Section 345 of the Bankruptcy Code.
The earnings on such investments shall be first applied to reimburse the Debtors
for their costs and expenses incurred in connection with the maintenance of the
Unpaid Claims Reserve and the making of distributions subsequent to the
Effective Date. All earnings in excess of such costs and expenses shall be held
in the Unpaid Claims Reserve and shall be distributed only in the manner set
forth below.
4. When a Disputed Claim becomes an Allowed Claim, the distributions
due on account of such Allowed Claim shall be released from the Unpaid Claims
Reserve and disbursed to the holder of such Allowed Claim. If the objection is
resolved in favor of the Debtors, the funds (including interest) and/or
Reorganized LVL Equity Securities will be distributed Pro Rata among the other
members of the Class to which the Claimant belongs.
VIII. UNCLAIMED PROPERTY
1. Unclaimed Property shall be deposited in the Unpaid Claims
Reserve to be held in trust for the benefit of the holders of Allowed Claims
entitled thereto. For a period of ninety (90) days following each attempted
distribution, Unclaimed Property shall be held in the Unpaid Claims Reserve
solely for the benefit of the holders of Allowed Claims
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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which have failed to claim such Property. During such ninety (90) day period,
Unclaimed Property due the holder of an Allowed Claim shall be released from the
Unpaid Claims Reserve and disbursed to such holder upon presentation of proper
proof by such holder of its entitlement thereto.
2. At the end of ninety (90) days after each attempted distribution,
the holders of Allowed Claims entitled to Unclaimed Property shall cease to be
entitled thereto. The Unclaimed Property shall then be treated as a portion of
funds available to pay creditors in the same class as the holder of Allowed
Claims that failed to claim his distribution. Such unclaimed funds shall be
promptly distributed Pro Rata to the other holders of Allowed Claims in the same
class as the holder of Allowed Claims that failed to claim his distribution.
IX. RETENTION, ENFORCEMENT AND WAIVER OF CLAIMS
Debtors shall retain and may enforce claims held by it or its estate
except such claims which have been waived, relinquished, or released in
accordance with this Plan.
X. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
All executory contracts and unexpired leases to which Debtors were parties
at the time the cases commenced will be rejected with the exception of the
executory contracts and unexpired leases listed on Exhibit "B" attached hereto
and incorporated by reference herein. The executory contracts and unexpired
leases listed on Exhibit "B" will be assumed at the Effective Date and assigned
to Reorganized LVL or LVL Subsidiary. The last date to file claims for rejected
contracts and/or unexpired leases shall be 30 days after the Effective Date. Any
entity
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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with a claim that arises from the rejection of an executory contract or
unexpired lease shall have the rights of a Class 5 unsecured claimant to the
extent such claim becomes an Allowed Claim in that Class.
XI. TAXES
No representations are made to any party concerning the tax attributes and
affects of this Plan. You are advised to consult your own tax adviser.
XII. REVESTING
Except as provided in the Plan or in the Confirmation Order, on the
Effective Date, Reorganized LVL shall be vested with all the property of
Debtors' estates free and clear of all claims, liens, security interests,
charges and other interests of the creditors arising prior to Confirmation.
XIII. BAR DATE AND NOTICE
1. Pre-Petition Claims: In accordance with Federal Rules of
Bankruptcy Procedure, Rule 3003(c)(3), the Court will establish a bar date as
the last day by which creditors would be permitted to file Proofs of Claim in
this case (the "Bar Date"). Pursuant to Bankruptcy Code Section 502 and Federal
Rules of Bankruptcy Procedure, Rule 3003(c)(2), any creditor whose claim is not
scheduled by Debtors or was scheduled as disputed, contingent or unliquidated,
and who fails to file a Proof of Claim on or before the Bar Date, will not be
treated as a creditor with respect to such claim for purposes of voting on, and
receiving a distribution under, the Plan. Debtors intend to file objections to
all late filed claims and to all duplicate, excessive or otherwise defective
claims.
2. Administrative Claims: Any creditor who has an Administrative
Expense Claim (other than for ordinary business
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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expenses payable in the ordinary course and other than professionals) shall file
a proof of claim or application for payment with the Court for such
administrative expenses on or before 45 days after the Effective Date and serve
a copy thereof on Debtors. Administrative Expense Claims filed after the
deadline set forth herein shall be barred and Debtors have no obligation to pay
such late filed claims. This provision specifically excludes administrative
claims of professionals employed in this Bankruptcy Case.
XIV. POST-CONFIRMATION BUSINESS TRANSACTIONS
Reorganized LVL shall have the flexibility to conduct its advertising and
interactive businesses as it deems necessary as long as Reorganized LVL does not
violate provisions of the Plan. Such business conduct may include, but is not
limited to, selling assets, selling equipment, entering into new lease
agreements, purchasing equipment and entering into new contracts. Reorganized
LVL may, at the same time, seek an opportunity for a merger or acquisition.
XV. RETENTION OF JURISDICTION
Notwithstanding Confirmation, the Bankruptcy Court shall retain full
jurisdiction as provided in 28 U.S.C. Section 1334 to enforce the provisions,
purposes, and intent of this Plan including, without limitation:
1. Determination of the allowability and priority of claims and
interests;
2. Determination of requests for payment of claims entitled to
priority under Section 507(a)(1) of the Bankruptcy Code, including compensation
of parties entitled thereto;
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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3. Resolution of controversies and disputes regarding interpretation
of this Plan;
4. Implementation of the provisions of this Plan and entry of orders
in aid of Confirmation of this Plan, including, without limitation, appropriate
orders to protect the Debtor from creditor action;
5. Modification of this Plan pursuant to Section 1127 of the
Bankruptcy Code and amendments to this Plan after substantial consummation;
6. Adjudication of any causes of action brought by the Debtor;
7. Any determination or estimation necessary or appropriate under
Section 505 of the Bankruptcy Code or other determination or estimation relating
to tax returns filed or to be filed by the Debtors for periods through the end
of the fiscal year in which the Effective Date occurs, including the
determination of the amount of taxes, net operating losses, tax attributes, tax
benefits, tax refunds, and related matters of the Debtors; and
8. Entry of a final decree closing this case.
XVI. POST-CONFIRMATION NOTICES
In the event it is necessary to provide notice to creditors after the Plan
is confirmed, notice will be mailed only to the following: (1) parties affected
by the noticed action, (2) committees appointed in the case, (3) Debtors, (4)
Reorganized LVL, (5) United States Trustee, and (6) parties requesting special
notice of post-confirmation matters.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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XVII. UTILITIES
All deposits made to utility companies during the pendency of this case
shall be returned to Debtors within fifteen (15) days after the Effective Date
of this Plan.
Date: April 15, 1998
LVL COMMUNICATIONS
CORPORATION
A California Corporation
By: /s/
-------------------------------------
Cal Lai
Chief Executive Officer
LVL ADVERTISING, INC.
A California Corporation
By: /s/
-------------------------------------
Cal Lai
Chief Executive Officer
LVL INTERACTIVE, INC.
A California Corporation
By: /s/
-------------------------------------
Steve Venuti
Chief Executive Officer
LAW OFFICES OF WILLIAM C. LEWIS
By: /s/
---------------------------------------
William C. Lewis
Attorneys for Debtors
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-33-
<PAGE>
Fujitsu Media Aging
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CMP
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
49244 8/7/96 $40,499.78
00376 8/12/96 $7,588.37
00614 8/12/96 $13,587.25
- -----------------------------------------------------------------------------------------------------------------
Total $61,675.40 $61,675.40
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Ziff-Davis
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
304548001 7/16/96 $20,797.67
304548001A 7/16/96 $8,576.77
305446001A 7/19/96 $8,604.49
305446002 7/19/96 $45,265.29
306417001 7/25/96 $32,779.33
309151001 8/13/96 $16,537.92
310137001 8/19/96 $19,089.92
- -----------------------------------------------------------------------------------------------------------------
Total $154,631.39 $154,631.39
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
McGraw-Hill
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
04615950 7/19/96 $35,309.28
04615996 7/31/96 $73,776.17
04616044 8/15/96 $73,776.17
- -----------------------------------------------------------------------------------------------------------------
Total $182,861.62 $182,861.62
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fortune
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
71896 7/18/96 $55,097.56
6424300 7/22/96 $64,145.25
- -----------------------------------------------------------------------------------------------------------------
Total $119,242.81 $119,242.81
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PC World
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
264507 7/18/96 $9,834.61
264508 7/18/96 $41,097.50
- -----------------------------------------------------------------------------------------------------------------
Total $50,932.11 $50,932.11
=================================================================================================================
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Forbes
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
48535 8/1/96 $46,827.16
46855 8/16/96 $54,516.58
- ---------------------------------------------------------------------------------------------------------------
Total $101,343.76 $101,343.76
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Transportation Media Inc.
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
004203 8/1/96 $16,352.60
037790 8/1/96 $17,425.00
038200 9/1/96 $11,475.00
038141 9/1/96 $17,425.00
- ---------------------------------------------------------------------------------------------------------------
Total $62,677.60 $62,677.60
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Dow Jones & Company, Inc.
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
24349963 7/31/96 $165,611.95
- ---------------------------------------------------------------------------------------------------------------
Total $165,611.95 $165,611.95
===============================================================================================================
</TABLE>
Total $899,176.64
Current $0.00
30 - Day $0.00
60 - Day $0.00
90+ - Day $899,176.64
Page 2
<PAGE>
S31 Media Aging
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Ziff-Davis
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
316210001 9/27/96 $11,493.53
316889001 10/2/96 $33,545.85
321519001 10/28/96 $11,493.63
322890001 11/6/96 $37,273.17
325814001 11/19/96 $6,637.63
316055001 11/20/96 $23,983.06
327422001 11/22/96 $12,621.45
327422002 11/22/96 $5,299.89
327422003 11/22/96 $5,299.89
328098002 11/26/96 $2,793.41
328098001 11/26/96 $2,793.41
328098004 11/26/96 $5,746.76
328098003 11/26/96 $2,793.41
329087001 12/5/96 $7,867.22
329087002 12/5/96 $7,867.22
329087003 12/5/96 $17,290.50
332548002 12/24/96 $5,299.89
332548001 12/24/96 $5,299.89
332548003 12/24/96 $12,621.45
333280003 12/26/96 $2,793.41
333280002 12/26/96 $2,793.41
333280001 12/26/96 $2,793.41
333280004 12/26/96 $5,746.76
335013003 1/9/97 $17,290.50
335013002 1/9/97 $7,867.22
335013001 1/9/97 $7,887.22
336754001 1/22/97 $19,211.67
336636001 1/22/97 $12,621.45
338361001 1/28/97 $6,047.71
341871001 2/18/97 $19,211.67
- ---------------------------------------------------------------------------------------------------------------
Total $0.00 $19,21l.67 $303,053.92 $322,265.59
===============================================================================================================
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PC World
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
279615 9/25/96 $31,450.00
292754 11/26/96 $15,725.00
298253 12/20/96 $17,061.63
- -----------------------------------------------------------------------------------------------------------------------------
Total $0.00 $0.00 $64,236.63 $64,236.63
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Wired
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
961023 9/5/96 $18,188.86
961424 11/7/96 $31,527.35
970153 12/9/96 $35,735.70
- - -----------------------------------------------------------------------------------------------------------------------------
Total $85,451.91 $85,451.91
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Addicted To Noise
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
212005 10/7/96 $5,100.00
301001 12/3/96 $5,100.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $10,200.00 $10,200.00
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Rolling Stone
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60- Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
34399 9/9/96 $92,310.00
34980 11/4/96 $40,273.00
35521 12/2/96 $46,155.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $178,738.00 $178,738.00
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Jumbo
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60- Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
269 10/31/96 $5,950.00
289 11/30/96 $5,950.00
318 1/3/97 $5,950.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $0.00 $17,850.00 $17,850.00
=============================================================================================================================
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Sports Illustrated
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6562230 10/14/96 $101,904.38
6655200 11/25/96 $50,952.19
6744390 1/27/97 $53,518.12
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $206,374.69 $206,374.69
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Popular Science
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4308740 11/10/96 $30,481.00
4336640 1/10/97 $28,751.20
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $59,232.20 $59,232.20
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Spotmedia Communications
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
247 11/1/96 $3,188.00
277 12/1/96 $3,188.00
332 1/1/97 $3,188.00
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $9,564.00 $9,564.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CNET: The Computer Network
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6206 11/30/96 $12,112.50
6207 11/30/96 $12,112.50
6272 1/13/97 $12,112.50
6290 1/31/97 $12,112.50
- ------------------------------------------------------------------------------------------------------------------------
Total 30 - Day $0.00 $48,450.00 $48,450.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
KNDD
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
36784501 12/24/96 $10,132.00
- ------------------------------------------------------------------------------------------------------------------------
Total $10,132.00 $10,132.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
KUBE-FM
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
54640601 12/29/96 $11,288.00
- ------------------------------------------------------------------------------------------------------------------------
Total $11,288.00 $11,288.00
========================================================================================================================
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
110105 11/30/96 $2,592.50
120055 12/22/96 $8,457.50
- -------------------------------------------------------------------------------------------------------------------
Total $11,050.00 $11,050.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Audio House Inc.
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
612192 12/22/96 $9,010.00
- -------------------------------------------------------------------------------------------------------------------
Total $9,010.00 $9,010.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KIIS FM
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120100 12/29/96 $15,470.00
- -------------------------------------------------------------------------------------------------------------------
Total $15,470.00 $15,470.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KFOG
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120184 12/29/96 $11,220.00
- -------------------------------------------------------------------------------------------------------------------
Total $11,220.00 $11,220.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KISW
- -------------------------------------------------------------------------------------------------------------------
Invoice # Dale Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
30413801 12/22/96 $15,096.00
- -------------------------------------------------------------------------------------------------------------------
Total $15,096.00 $15,096.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KYLD
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120090 12/29/96 $2,585.00
- -------------------------------------------------------------------------------------------------------------------
Total $2,585.00 $2,585.00
===================================================================================================================
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
KMEL
- ----------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120169 12/29/96 $6,375.50
- ----------------------------------------------------------------------------------------------------------------------
Total $6,375.50 $6,375.50
======================================================================================================================
</TABLE>
Total $1,094,589.52
Current $0.00
30 - Day $0.00
60 - Day $19,211.67
90+ - Day $1,075,377.85
Page 5
<PAGE>
LEASE COMPANIES 10/30/97
<TABLE>
<CAPTION>
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
AT&T Capitol Corp Kathy Sanchez 800-835-5699 x6245 $8,914.12
(Syquest, Quantum hard P.O. Box 85047 #00394847
drives/Quark software) Louisville, KY 40285 #00314014
AT& T Credit
Corporation P.O. Box 85340 about $12,000
(Merlin Legend voice Louisville, KY 40285 10044W207626-
mail system, accessories) Attn: Frank Taylor 00011, 00020,
00030, 00040,
00050, 00060,
00080, 00090,
00100, 00110,
00140
Copelco Steve Russell 609-231-9600 x 4103 $10,016.32
(Office Furniture) P.O. Box 8500-1700 #0546910
Philadelphia, PA 19178 #0427760
Goodman & Metz
(legal for 16000 Ventura Blvd., Ste. 905
Copelco) Encino, CA 91436
818-386-2889
Attn: Jordan Metz
Dana Commercial Darryl Bo 201 Big Beaver Road $17,414.27
(Duos, docking station, P.O. Box 7100 #334788
Mac computers, monitors) Troy, MI 48007 #340359
Juke box, Pinnacle OPT Attn: Darrell Bowe
disk, Phaser printer) Ph: 800-821-3921
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
Greentree Vendor Vicki Maulner P.O. Box 6167 $3,515.91
Services (formerly Carol Stream, IL 60197
Cambridge) 201-712-3566 $3,798.96
(Sun Sparc station, #7191107
CD ROM drive, peripherals #7191906
for workstation)
IKON Office Jean Bell 510-988-4245 $19,431.25
(formerly Alco) #6583116001
(Canon Color copier, Lease 19058
Flery)
(Payment) File #73004
P.O. Box 60000
San Francisco, CA 94160-3004
(Correspondence) 1550 Parkside Dr.
Walnut Creek, CA 94596
LeaseTec Elaine Stuart 1401 Pearl Street $5,483.61
(Sun Ultra 170 Boulder, CO 80302 #CA4009
computer, upgrades, 303-443-8064 #L5503
Netscape server,
critical network gear)
Lucent Technologies Maggie Fields American Bureau of $9787.19
(voice mail add-on) Collections West, Inc #00181557463
(collections) 2500 Red Hill Avenue File#742-690
Suite 200
Santa Ana, CA 92705-9946
Ph: 714-261-1146
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fax: 714-281-9149
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
Lucent Hal Glassberg Glassberg, Pollack & Auerbach
Technologies 44 Montgomery St. Ste 1660
(legal) San Francisco, CA 94104
Ph: 415-291-8320
Fax: 415-219-8111
Lucent Technologies P.O. Box 10193
Van Nuys, CA 91410-0193
800-247-700
Manifest Group Deb Johnson P.O. Box 5179 $10,016.32
(5 Quadras, Mac7100s,) Sioux Falls, SD 57117 #502859
9 monitors, keyboards, 800-325-2236 x3249
external drives, etc.)
Rockford
Industries Eric Treanor 800-736-0220 $11,374.90
(Lasermaster printer) 1055 Westlakes Drive #24120283
(collections) Berwyn, PA 19312 or #13719
Rockford Industries 800-736-02200
P.O. Box 105819
Atlanta, GA 30348-5819
</TABLE>
* NOTE: Dollar amounts shown for leases are figures the lease companies--these
include accelerated payments FOR ENTIRE LEASES, LATE CHARGES AND OTHER AMOUNTS
THEY SAY NEED TO BE PAID TO REINSTATED LEASES.
<PAGE>
<TABLE>
<CAPTION>
12/19/97 Rental Agremeent #/ PERSONAL GUARANTEE/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED KEEP OR RETURN EQUIP.
<S> <C> <C> <C> <C>
Xerox Corporation Western Admin Center Cust. #691901417 No guarantee: rental,
(color copier, Fiery, P.O. Box 25074 Keep equipment.
2 B&W copiers) Santa Ana, CA 92799
</TABLE>
<PAGE>
LVL Communications lease for space at 499 Cowper Street, Palo Alto, CA,
from RRC Partners, a California limited liability company
LVL Communications lease for space at 1546 7th Street, Santa Monica,
CA, from 7th Street Partners, Ltd., a California Limited Partnership
Agreement to Assume Lease dated December 9, 1997 between LVL
Communications Corporation and Steelcase, Inc., for an assignment of the 499
Cowper Street Lease, and all related agreements
Exclusive Authorization and Right to Lease with Wayne Mascia and
Associates dated August 28, 1997, as amended by letter dated November 13, 1997
Agreement to Engage Mackenzie Shea, Inc. as Business Consultants for
LVL Communications, Inc., effective as of September 9, 1997, as amended by the
Plan
401(k) Plan
Accrued vacation pay and other employee benefits for employees who are
employed by the Debtors as of the date of commencement of the Chapter 11 Cases
Hartford Ins. Co. of the Midwest Package Policy #57UUCFH1184
Hartford Casualty Co. Umbrella Policy #57XHUYZ9729
Hartford Fire Ins. Co. Package Policy #57SBAEN8572
Hartford Casualty Co. Umbrella Policy #57XHUXK9788
State Fund Workers' Compensation Policy #1463048
May 5, 1998
President & CEO LVL Interactive
480 Cowper Palo Alto, CA 94301
Dear Steve:
This will serve as a memo of understanding between Oracle Corporation and LVL.
We are enthusiastic about the market opportunity that exists for the combination
of talents and resources offered by our firms. Through our discussions over the
past weeks we believe we have defined the market opportunity, roles of each firm
in the pursuit of these opportunities and the framework of an agreement that
would govern our working relationship. It is understood that this document does
not constitute a formal agreement. Rather it is intended to communicate the
basic understanding that has been achieved to date. If a formal contract is
required we intend to negotiate in good faith over a target number of 45 days to
solidify such a formal agreement. It is also understood that we will begin
working together immediately in the pursuit of these target opportunities as
defined below.
MARKET OPPORTUNITY
High profile companies with very strong brand recognition represent a unique
opportunity for Oracle and LVL. They will all eventually have a world class
website which will allow them to sell products over the Internet. Websites that
are effective in the marketing and business processes (handling transactions,
scalability and manageability) are the exception, not the rule. Consumer
marketing companies need the technical software expertise and the web-savvy
marketing expertise of a firm like LVL to help design, develop, implement and
manage a world class electronic marketing site.
Our intention is to target 3 to 10 such companies together, including all facets
of the sales cycle from prospecting to closure, and then jointly win the
opportunity to build their next generation electronic sales and marketing
website. If successful, Oracle and LVL will each win significant contracts for
the development and management of the sites. It is expected that Oracle will be
the subcontractor to LVL, given the nature of the agreement that LVL intends to
pursue with the account. Regardless of Oracle's role as prime or subcontractor,
it is anticipated that the sites will require significant software and services.
The exact software, services and pricing for these sites will be negotiated on a
case by case basis through the normal Oracle sales and consulting practices,
either directly with LVL or with the end customer if appropriate.
<PAGE>
ROLES
LVL intends to win the rights to develop and own the site for each target
account. In this case, Oracle is a subcontractor and LVL purchases the software
and services from Oracle to build the site. Oracle will contract with LVL, to
provide the software and services as needed for the project per Oracle's
standard and customary rates.
Additionally, Oracle and LVL will jointly invest the pre-sales and upfront
marketing resources needed to win the opportunities.
FRAMEWORK OF A PROPOSED AGREEMENT
Oracle has three primary interests in the target opportunities
1. We want to sell software and services to our current competitive market
rates.
2. We want to co-brand the sites "On Oracle" technology and have the
rights to reference them in Oracle marketing efforts to establish our
Firm as the premier provider for the electronic commerce market.
3. We want to lean from the experience so we can develop a scaleable model
for profitably pursuing and winning this business in the future.
In order to accomplish these three objectives we would like to formalize an
agreement that defines all necessary specific obligations for both parties. The
target is 45 days to decline and complete the agreement.
Specifically with regard to objective number 3, we are each proposing that
Oracle pay LVL the sum of $25,000 for at least three and no more than ten of
such opportunities. Oracle will devote pre-sales resources to develop and win
the opportunities. LVL will use the money to do the same.
It is proposed that Oracle will receive the following benefit from $25,000 per
initial opportunity.
1. Co-branding the sites "On Oracle" or some other appropriate mark that
indicates that Oracle provided the technology and services to help
develop the site.
2. A 2 - 3 page report on each of the 3 - 10 cases indicating all the
requirements of the project, what it took to win the job, get the job
done, et.
Both of these benefits will be spelled out in more specific terms in the final
contract that governs our working relationship. Until that final agreement is
reached, Oracle and LVL will work on a case by case basis to pursue the
opportunities together. It is anticipated that the first opportunity to work
together is upon us in less that the six weeks we think it will take to get a
contract done, we are inclined to work on a "letter agreement" basis for each
project. It is incumbent upon LVL to draft a simple letter stating the
deliverables for the $25K fee for each opportunity until an agreement is made
final.
We are very enthusiastic about the opportunity. Thanks for working on it with us
so far.
Regards,
/S/ Michael Keddington
- ---------------------------
Michael Keddington
Vice President of marketing
Application Server Division
LVL
Philips Mobile Computing Group CyberStore
PRELIMINARY LETTER OF Intent
This Preliminary Letter of Intent between LVL Communications,
Inc. ("LVL") and Philips Mobile Computing Group ("PMCG") summarizes
their MUTUAL interest in forming a joint venture and/or creating a
licensing agreement to develop and operate a retail website under the
PMCG name dedicated to selling PMCG and compatible products to
consumers over the Internet. This Letter of Intent is strictly
preliminary and is intended primarily to establish a basis for future
definitive discussions. This Preliminary Letter of Intent is
non-binding on either party.
BUSINESS PURPOSE: To develop and operate an Internet website
("CyberStore") dedicated to exclusively selling PMCG and compatible
products to retail customers for profit.
ENTERPRISE STRUCTURE: A U.S. corporation or limited liability
company (the "CyberStore Enterprise") funded through equity and debt
supplied by LVL or its investors. LVL will be the operating partner
responsible for CyberStore development, operation and expansion with
sole responsibility for financing Website development and operating
losses (initial budgeted capital: $2 million). PMCG will make
available the full PMCG branded product line to the CyberStore
Enterprise and will be responsible for product inventory and order
fulfillment. After repayment of initial start-up costs, PMCG will
receive payments based upon Enterprise revenue or profits on terms to
be negotiated.
CONTRIBUTION/ROLE BY PARTY:
LVL: Development capital ($1 million budgeted)
Operating expenses ($1 million budgeted)
Facilities and personnel
Marketing and management services
Web-oriented advertising and promotion
Sales order entry and customer service
Customer billing and collection
Account and financial reporting
PMCG: Pull PMCG-branded product line
Product inventory
Order fulfillment
Customer technical support
Warranty and repair services
Non-Web advertising and promotion
Page 1
<PAGE>
ENTERPRISE TERMS:
EXCLUSIVITY: Although other retail websites may sell PMCG products as
part of a broader product offering, PMCG agrees to naming the
CyberStore Enterprise as the exclusive website for the full line of
PMCG-branded products under the PMCG name.
PRICING: The CyberStore Enterprise shall be permitted to PRICE PMCG
products at the best retail price offered to consumers by other PMCG
dealers ("street price") or the best retail price for PMCG products
offered by another website, whichever is lower.
PURCHASING: The CyberStore Enterprise shall be able to purchase any
PMCG branded product at the best price available to any PMCG customer
with similar terms and conditions.
SERVICES: The CyberStore Enterprise shall be responsible for
marketing, merchandising, customer contact, billing and collection,
and other sales activities. PMCG shall be responsible for order
fulfillment, technical support ,warranty and repair, and similar
functions. To the extent that PMCG IS unable to perform necessary
functions, the CyberStore Enterprise shall provide FOR THE performance
of these functions and deduct their cost from Enterprise payments to
PMCG.
ADVERTISING: PMCG agrees to prominently feature the CyberStore
Enterprise name and web address in PMCG-brand advertising. THE
CYBERSTORE ENTERPRISE will create and place at its own expense
Web-oriented advertising compatible with PMCG advertising programs.
Both parties agree to cooperate on joint advertising programs and
promotions.
REPURCHASE: After three years, PMCC may purchase LVL's ownership in
the CyberStore Enterprise on the anniversary of the date of the full
Agreement for cash at a price determined by third-party appraisal.
Upon acquisition of LVL's ownership interest, PMCG will have sole
responsibility for operation of the Enterprise.
SCHEDULE: Upon negotiation and execution of a definitive agreement,
LVL will provide initial funding to the Enterprise and begin
development of the CyberStore website with the intention of commencing
retail sales within 6 months.
AUTHORIZATION TO PROCEED WITH A FEASIBILITY STUDY: By signing this Letter OF
Intent, PMCG authorizes LVL Communications to begin a Feasibility Study AT LVL'S
EXPENSE to analyze PMCG's current infrastructure and business processes AS A
BASIS FOR FORMING a CyberStore Enterprise dedicated to PMCG products. The intent
of this study is to create a business case for managing and maintaining PMCG's
online commerce in an outsource model. This study does not obligate PMCG to move
forward on the formation of a CyberStore Enterprise, but is intended to provide
a framework for future discussions.
page 2
<PAGE>
PARTNERSHIP WITH ORACLE
Oracle has entered into a tentative agreement with LVL to provide services and
products required to implement the technical back-end development of these
CyberStores. Oracle has agreed to partner with LVL in developing the initial
Feasibility Study required as the first part of building an on-line retail
presence.
This Preliminary Letter of Intent is only an expression of mutual intent in
negotiating a Definitive Agreement regarding the formation of the CyberStore
Enterprise along the lines described above. Neither party is obligated to move
forward in this proposed relationship; all terms and conditions are subject to
modification AND may change substantially in the Definitive Agreement (if any).
LVL Communications: Philips Mobile Computing Group
/S/ Calbert Lai 4/28/98 /S/ Robert Brown 4/28/98
Calbert Lai Robert Brown
Chairman & CEO Director of Marketing
Page 3
Sun Microsystems CyberStore
Letter of Understanding
This Letter summarizes the mutual interest of I-Storm, Inc. ("ISTM") and Sun
Microsystems ("SUN") in exploring the possibility of forming a
distribution/reseller agreement to develop and operate a retail website under
the SUN name dedicated to selling SUN and compatible products to customers over
the Internet. This Letter of Understanding is strictly preliminary and is
intended primarily to establish a basis for possible future definitive
discussions. This Letter does not obligate either party to enter into a binding
agreement.
Business Purpose: To explore the possibility of developing and operating an
Internet website ("CyberStore") dedicated to exclusively selling SUN and
compatible products to retail customers for profit.
Authorization to Proceed with Feasibility Study: By signing this Letter, and
subject to the execution of an appropriate Confidentiality Agreement, SUN
authorizes ISTM to begin a Feasibility Study at ISTM's sole expense to analyze
SUN'S current infrastructure and business processes as a basis for forming a
CyberStore enterprise dedicated to SUN products. The intent of this study is to
create a business case for managing and maintaining the SUN's online commerce in
an outsource model. This study does not obligate SUN to move forward on the
formation of a CyberStore enterprise or any other relationship, but is intended
to provide a framework for future discussions, if any. Sun may terminate this
Feasibility Study at any time without subjecting Sun to any liability
whatsoever.
For I-Storm, Inc. For Sun Microsystems:
/S/ Steve Venuti /S/ Bobbi Burns
- ---------------- ---------------
Title: VP,GM Title: Director, Web Commerce
12/7/98 12/4/98
- ------- -------
Date Date
LVL
Garden Botanika CyberStore
Letter of Interest
This Letter of Interest between LVL Communications, Inc. ("LVL") and Garden
Botanika ("GBOT") summarizes their mutual interest in forming a joint venture
and/or creating a licensing agreement to develop and operate a retail website
under the GBOT name dedicated to selling GBOT and compatible products to
consumers over the Internet. This Letter of Interest is strictly preliminary and
is intended primarily to establish a basis for future definitive discussions.
This Letter of Interest is non-binding on either party.
BUSINESS PURPOSE: To develop and operate an Internet website ("CyberStore")
dedicated to exclusively selling GBOT and compatible products to retail customer
for profit.
ENTERPRISE STRUCTURE: A U.S. corporation or limited liability company (the
"CyberStore Enterprise") funded through equity and debt supplied by LVL or its
investors. LVL will be the operating partner responsible for CyberStore
development, operation and expansion, with sole responsibility for financing
website development and operating losses ($2 million budgeted). GBOT will make
available the full GBOT branded product line to the CyberStore Enterprise and
will be responsible for product inventory and order fulfillment.
AUTHORIZATION TO PROCEED WITH A FEASIBILITY STUDY: By signing this Letter of
Interest, GBOT authorizes LVL Communications to begin a Feasibility Study at
LVL's expense to analyze GBOT's current infrastructure and business processes as
a basis for forming a CyberStore Enterprise dedicated to GBOT products. The
intent of this study is to create a business case for managing and maintaining
GBOT's online commerce in an outsource model. This study does not obligate GBOT
to move forward on the formation of a CyberStore Enterprise, but is intended to
provide a framework for future discussions.
PARTNERSHIP WITH ORACLE:
Oracle has entered into a tentative agreement with LVL to provide services and
products required to implement the technical back-end development of these
CyberStores. Oracle has agreed to partner with LVL in developing the initial
Feasibility Study required as the first part of building an on-line retail
presence.
The Letter of Interest is only an expression of mutual intent in negotiating a
Definitive Agreement regarding the formation of the CyberStore Enterprise along
the lines described above. Neither party is obligated to move forward in this
proposed relationship, all terms and conditions are subject to modification and
may change substantially in the Definitive Agreement (if any).
LVL Communications: Garden Botanika:
/S/ Calbert Lai /S/ Arlee Jensen
Calbert Lai Arlee Jensen
Chairman & CEO Senior Vice President, Merchandising and
Marketing
December 15, 1999
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D,C. 20549
Re: I-Storm, Inc. (formerly Digital Power Holding Company), a Nevada Corporation
Commission File No. 2-93477-D
Ladies and Gentlemen:
We were previously the independent accountants for the Company and on April 8,
1998 we reported on the financial statements of the Company for the fiscal years
ended March 31, 1998 and 1997. On December 15, 1999, we were formally dismissed
as the independent accountants of I-Storm, Inc. (formerly Digital Power Holding
Company).
We have read the Company's statements included under Item 4 of this current
report on Form 8-K dated July 1, 1998 and have no disagreements with the
disclosure made therein.
Very truly yours,
/s/ Jones, Jensen & Company
Jones, Jensen & Company
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